-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lg6NgClrgUYZNbWfnJOJbGQ3Kvj8WYrOBgNPqUo/nM0Vs/OlxK7DlF/boknTCmFV CKNLSKbkdkdKqWvBBGBV/Q== 0000950152-00-002564.txt : 20000331 0000950152-00-002564.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950152-00-002564 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIFTH THIRD BANCORP CENTRAL INDEX KEY: 0000035527 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 310854434 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08076 FILM NUMBER: 588352 BUSINESS ADDRESS: STREET 1: 38 FOUNTAIN SQ PLZ STREET 2: FIFTH THIRD CENTER CITY: CINCINNATI STATE: OH ZIP: 45263 BUSINESS PHONE: 5135795300 10-K 1 FIFTH THIRD BANCORP 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from_______ to _______ Commission file number 0-8076 FIFTH THIRD BANCORP (Exact name of Registrant as specified in its charter) Ohio 31-0854434 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 38 Fountain Square Plaza Cincinnati, Ohio 45263 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (513) 579-5300 Securities registered pursuant to Section 12(g) of the Act: Common Stock Without Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: [ X ] No: [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The Aggregate Market Value of the Voting Stock held by non-affiliates of the Registrant was $15,230,004,978 as of March 29, 2000. (1) There were 309,380,174 shares of the Registrant's Common Stock, without par value, outstanding as of February 29, 2000. DOCUMENTS INCORPORATED BY REFERENCE 1999 Annual Report to Shareholders: Parts I, II and IV Proxy Statement for 2000 Annual Meeting of Shareholders: Parts III and IV (1) In calculating the market value of securities held by non-affiliates of Registrant as disclosed on the cover page of this Form 10-K, Registrant has treated as securities held by affiliates as of December 31, 1999, voting stock owned of record by its directors and principal executive officers, shareholders owning greater than 10% of the voting stock and voting stock held by Registrant's trust departments in a fiduciary capacity. 2 FIFTH THIRD BANCORP 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Page ---- Item 1. Business 3-16 Item 2. Properties 17 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 17 PART II Item 5. Market For Registrant's Common Equity and Related Shareholder Matters 18 Item 6. Selected Financial Data 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-19 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19 Item 8. Financial Statements and Supplementary Data 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 PART III Item 10. Directors and Executive Officers of the Registrant 20-23 Item 11. Executive Compensation 23 Item 12. Security Ownership of Certain Beneficial Owners and Management 23 Item 13. Certain Relationships and Related Transactions 23 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 24-30 2 3 PART I ITEM 1. BUSINESS - ----------------- ORGANIZATION Fifth Third Bancorp (the "Registrant") is an Ohio corporation organized in 1975 as a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "Act"), and subject to regulation by the Federal Reserve Board ("FRB"). The Registrant, with its principal office located in Cincinnati, is a multi-bank holding company as defined in the Act and is registered as such with the Board of Governors of the Federal Reserve System and at December 31, 1999 had 18 wholly-owned subsidiaries: Fifth Third Bank; Fifth Third Bank, Central Ohio; Fifth Third Bank, Northwestern Ohio, N.A.; Fifth Third Bank, Ohio Valley; Fifth Third Bank, Western Ohio; Fifth Third Bank, Florida; Fifth Third Bank, Northern Kentucky, Inc.; Fifth Third Bank, Kentucky, Inc.; Fifth Third Bank, Indiana; Fifth Third Bank, Southwest, F.S.B.; Civitas Bank; Fifth Third Community Development Company; CNB Capital Trust I; Fifth Third Investment Company; Calvin Hotel Co.; Fifth Third Securities; State Savings Mortgage Company and Heartland Capital Management, Inc. On March 17, 2000, Fifth Third Bank, Indiana merged into Civitas Bank and Civitas Bank simultaneously changed its name to Fifth Third Bank, Indiana. At December 31, 1999, the Registrant, its affiliated banks and other subsidiaries, had consolidated total assets of $41.6 billion, consolidated total deposits of $26.1 billion and consolidated total shareholders' equity of $4.1 billion. The Registrant, through its subsidiaries, engages primarily in commercial, retail and trust banking, data processing services, investment advisory services and leasing activities. In addition, the Registrant provides credit life, accident, health and mortgage insurance, discount brokerage services and property management for its properties. Each of the banking affiliates has deposit insurance provided by the Federal Deposit Insurance Corporation ("FDIC") through the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). Significant subsidiaries of the Registrant's affiliate banks consist of The Fifth Third Company; The Fifth Third Leasing Company; Midwest Payment Systems, Inc. ("MPS"); Fifth Third International Company; Fifth Third Real Estate Capital Markets Co.; Fifth Third Mortgage Company; Fifth Third Real Estate Investment Trust, Inc.; Fifth Third Insurance Reinsurance Company; and Fifth Third Insurance Agency. The Registrant's subsidiaries provide a full range of financial products and services to the retail, commercial, financial, governmental, educational and medical sectors, including a wide variety of checking, savings and money market accounts, and credit products such as credit cards, installment loans, mortgage loans and leasing. The Registrant, through its MPS subsidiary, operates for itself and other financial institutions a proprietary automated teller machine ("ATM") network, Jeanie(R). The Jeanie(R) system participates in several regional shared ATM networks including "Money Station(R)," "Pulse(R)" and "Star(R)". These networks include approximately 6,500, 42,000 and 70,000 ATMs, respectively. The "Money Station(R)" network, in which the Registrant has a 20% ownership, participates in another shared ATM network called "PLUS System(R)," which is a nationwide network with over 490,000 participating ATM's. MPS also provides electronic fund transfers, 3 4 PART I ITEM 1. BUSINESS (CONTINUED) - ----------------------------- ORGANIZATION ATM processing, electronic personal banking, merchant transaction processing, electronic bill payment and electronic benefit transfer services for several regional banks, bank holding companies, service retailers and other financial institutions throughout the United States. Fifth Third International Company has a 99.9 percent-owned subsidiary: Fifth Third Trade Services Limited. Fifth Third Investment Company owns the remaining .01 percent. These subsidiaries provide foreign exchange trading, automated letters of credit and import/export services to commercial customers. The Fifth Third Leasing Company has a 100 percent-owned subsidiary: The Fifth Third Auto Leasing Trust, which provides indirect auto loans and leases to consumers. Additional information regarding the Registrant's businesses is included in the Management Editorial (pages 4 -12) in the Registrant's 1999 Annual Report to Shareholders and is incorporated herein by reference and attached to this filing as Exhibit 13. ACQUISITIONS The Registrant is the result of mergers and acquisitions over the years involving financial institutions throughout Ohio, Indiana, Kentucky, Michigan, Illinois, Arizona and Florida. The Registrant's strategy for growth includes strengthening its presence in core markets, expanding into contiguous markets and broadening its product offerings. Consistent with this strategy the Registrant completed the following acquisitions during 1999: On November 19, 1999, the Registrant acquired Peoples Bank Corporation of Indianapolis ("Peoples") and its subsidiary, Peoples Bank & Trust Company with total assets of $675 million and total deposits of $587 million. The Registrant exchanged 3,381,220 shares of Fifth Third common stock for each outstanding share of Peoples. On October 29, 1999, the Registrant acquired CNB Bancshares, Inc. ("CNB") a bank holding company based in Evansville, Indiana which owns Civitas Bank, with total assets of $7.9 billion and total deposits of $4.9 billion. The Registrant exchanged 30,370,745 shares of Fifth Third common stock for each outstanding share of CNB. On August 6, 1999, the Registrant acquired Emerald Financial Corp., ("Emerald") a unitary savings and loan holding company based in Strongsville, Ohio with total assets of $677 million and total deposits of $562 million. The Registrant exchanged 3,379,539 shares of Fifth Third common stock for each outstanding share of Emerald. 4 5 PART I ITEM 1. BUSINESS (CONTINUED) - ----------------------------- ACQUISITIONS In addition, to the above mentioned acquisitions, the Registrant acquired Vanguard Financial Co., based in Cincinnati, Ohio; Enterprise Federal Bancorp, Inc. based in West Chester, Ohio; South Florida Bank Holding Corporation, based in Ft Myers, Florida; and Ashland Bankshares, Inc., based in Ashland, Kentucky. Information, with respect to acquisitions is included in Note 18 (pages 25-26) of the Notes to Consolidated Financial Statements in the Registrant's 1999 Annual Report to Shareholders, and is incorporated herein by reference and attached to this filing as Exhibit 13. COMPETITION There are hundreds of commercial banks, savings and loans and other financial service providers in Ohio, Kentucky, Michigan, Illinois, Indiana, Arizona, Florida and nationally, which provide strong competition to the Registrant's banking subsidiaries. The Registrant competes for deposits; loans and other banking services in its principal geographic markets as well as in selected national markets as opportunities arise. In addition to the challenge of attracting and retaining customers for traditional banking services, the Registrant's competitors now include securities dealers, brokers, mortgage bankers, investment advisors and insurance companies who seek to offer one-stop financial services to their customers which include services that traditional banks have not been able or allowed to offer their customers in the past. Moreover, under the Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley Act"), effective March 11, 2000, securities firms, insurance companies and other financial services providers that elect to become financial holding companies may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act may significantly change the competitive environment in which the Registrant conducts business. See "Regulation and Supervision" below. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology, product delivery systems and the accelerating pace of consolidation among financial service providers. These competitors with focused products targeted at highly profitable customer segments, compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all-significant products. These competitive trends are likely to continue. The Registrant's ability to maintain its history of strong financial performance and return on investment to shareholders will depend in part on the Registrant's ability to expand its scope of available financial services as needed to meet the needs and demands of its customers. With respect to data processing services, the Bank's data processing subsidiary, MPS, competes with other electronic fund transfer (EFT) service providers such as Concord EFS, Inc., Deluxe Corporation and Electronic Data Systems and other merchant processing providers such as First Data Corporation, National Processing, Inc. and First USA Paymentech, Inc. 5 6 PART I ITEM 1. BUSINESS (CONTINUED) - ----------------------------- REGULATION AND SUPERVISION The earnings of the Registrant are affected by general economic conditions as well as by the monetary policies of the FRB. Such policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon the source and cost of funds and the rates of return earned on loans and investments. The Federal Reserve System exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in U.S. Government securities, varying the discount rate on member bank borrowings and setting cash reserve requirements against deposits. Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the purchase of investments, the generation of deposits and rates received on loans and investment securities and paid on deposits. Fluctuations in the Federal Reserve monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The Registrant, as a bank holding company, is subject to the restrictions of the Act. The Act provides that the acquisition of control of a bank is subject to the prior approval of the Board of Governors of the Federal Reserve System. The Registrant is required to obtain the prior approval of the FRB before acquiring control of more than 5 percent of the voting shares of another bank. The Act does not permit the FRB to approve an acquisition by the Registrant, or any of its subsidiaries, of any bank located in a state other than Ohio, unless the acquisition is specifically authorized by the law of the state in which such bank is located. On September 29, 1994, the Act was amended by The Interstate Banking and Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in the country effective one year after the date of enactment, and interstate branching by acquisition and consolidation effective June 1, 1997, in those states that have not opted out by that date. The Act limits the activities which may be engaged in by the Registrant and its subsidiaries to ownership of banks and those activities which the FRB has deemed or may in the future find to be so closely related to banking as to be a proper incident thereto. The Gramm-Leach-Bliley Act, which became law on November 12, 1999, repeals provisions of the Glass-Steagall Act: Section 20, which restricted the affiliation of banks with firms "engaged principally" in specified securities activities and Section 32, which restricts officer, director, or employee interlocks between a bank and any company or person "primarily engaged" in specified securities activities. Moreover, the general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers by revising and expanding the 6 7 PART I ITEM 1. BUSINESS (CONTINUED) - ----------------------------- REGULATION AND SUPERVISION Act framework to permit a holding company system, such as the Registrant, to engage in a full range of financial activities through a new entity known as a financial holding company. "Financial activities" are broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the FBR, in consultation with the Secretary of the Treasury, determines to be financial in nature. These activities are incidental to such financial activities or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system in general. In sum, the Gramm-Leach-Bliley Act is intended to permit bank holding companies that qualify and elect to be treated as a financial holding company to engage in a significantly broader range of activities described above that are not so treated. In order to elect to become a financial holding company and engage in the new activities, a bank holding company must meet certain tests and file an election form with the FRB, which generally is acted on within thirty days. To qualify, all of a bank holding company's subsidiary banks must be well-capitalized and well-managed, as measured by regulatory guidelines. In addition, to engage in the new activities each of the bank holding company's banks must have been rated "satisfactory" or better in its most recent Federal Community Reinvestment Act evaluation. Furthermore a bank holding company that elects to be treated as a financial holding company may face significant consequences. If its banks fail to maintain the required capital and management ratings including entering into an agreement with the FRB which imposes limitations on its operations and may even require divestitures. Such possible ramifications may limit the ability of a bank subsidiary to significantly expand or acquire less than well-capitalized and well-managed institutions. The Registrant elected to become a financial holding company. The Registrant's subsidiary state banks are primarily subject to the laws of the state in which each is located, the Board of Governors of the Federal Reserve System and the FDIC. The Registrant's national bank is subject to regulation by the Comptroller of the Currency and the FDIC. The Registrant's savings and loan subsidiary is subject to regulation by the Office of Thrift Supervision. The Registrant is required to file reports of its operations with the Board of Governors of the Federal Reserve System and the Office of Thrift Supervision, and is subject to examination. The Registrant and its subsidiaries are subject to certain restrictions on intercompany loans, investments, and restrictions on the terms of transactions between the Registrant and its affiliates and on any extension of credit to its affiliates. Dividends payable by the affiliate banks to the Registrant without express regulatory approval are limited by a formula. The Registrant and its subsidiaries are also subject to certain restrictions with respect to engaging in the underwriting and public sale and distribution of securities. The Registrant's commercial banks are subject to 7 8 PART I ITEM 1. BUSINESS (CONTINUED) - ----------------------------- REGULATION AND SUPERVISION requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the type of services which may be offered. Various consumer laws and regulations also effect the operations of the Registrant's banking subsidiaries. The Registrant's state-chartered banking subsidiaries are subject to federal and state regulation of their activities and business, including in the case of banks chartered in Ohio, by the Ohio Division of Financial Institutions; in Kentucky, by the Kentucky Department of Financial Institutions; in Indiana, by the Indiana Department of Financial Institutions; in Florida, by the Florida Department of Banking and Finance; and in Michigan, by the Financial Institutions Bureau. The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the FDIC in connection with the default of, or any FDIC-assisted transaction involving an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Improvement Act") covers a wide expanse of banking regulatory issues. The FDIC Improvement Act deals with the recapitalization of the Bank Insurance Fund, with deposit insurance reform, including requiring the FDIC to establish a risk-based premium assessment system, and with a number of other regulatory and supervisory matters. Additional information regarding regulatory matters is included in Note 15 (page 24) of the Notes to Consolidated Financial Statements in the 1999 Annual Report to Shareholders, and is incorporated herein by reference and attached to this filing as Exhibit 13. EMPLOYEES As of December 31, 1999, there were no employees of the Registrant. Subsidiaries of the Registrant employed 12,240 employees -- 1,624 were officers and 1,700 were part-time employees. There were 11,692 full-time equivalent employees as of December 31, 1999. 8 9 PART I ITEM 1. BUSINESS (CONTINUED) - ----------------------------- STATISTICAL INFORMATION Pages 9 to 14 contain statistical information on the Registrant and its subsidiaries. Information about the Registrant's business segments is incorporated herein by reference to pages 28 and 29 of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. AVERAGE BALANCE SHEETS The average balance sheets for each of the last three fiscal years are incorporated herein by reference to Table 1 on page 31 of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. ANALYSIS OF NET INTEREST INCOME AND NET INTEREST INCOME CHANGES The analysis of net interest income and the analysis of net interest income changes are incorporated herein by reference to Table 1 and Table 2 and the related discussion on pages 32 through 33 of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. INVESTMENT SECURITIES PORTFOLIO The investment securities portfolio as of December 31 for each of the last five years and the maturity distribution and weighted average yield of investment securities as of December 31, 1999, are incorporated herein by reference to the securities portfolio and maturities of securities tables on page 36 of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. The weighted average yields for the investment securities portfolio are yields to maturity, weighted by the par values of the investment securities. The weighted average yields on investment securities exempt from income taxes are computed on a taxable-equivalent basis. The taxable-equivalent yields are net after-tax yields to maturity divided by the complement of the full corporate tax rate (35 percent). In order to express yields on a taxable-equivalent basis yields on obligations of states and political subdivisions (municipal securities) have been increased as follows: Under 1 year 3.07% 1 - 5 years 2.87% 6 - 10 years 2.71% Over 10 years 2.42% Total municipal securities 2.63% 9 10 TYPES OF LOANS AND LEASES A summary of loans and leases by major category for the last five fiscal years ended as of December 31 follows ($000's):
1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Commercial, financial and agricultural loans $ 6,206,712 5,558,578 5,751,656 5,173,420 4,722,344 Real estate - construction loans 1,067,887 826,289 723,809 742,674 623,135 Real estate - mortgage loans 7,465,349 7,884,032 8,336,299 8,019,065 7,043,320 Consumer loans 5,283,684 4,458,005 4,053,995 3,652,083 4,081,271 Lease financing 5,862,606 4,343,010 3,621,773 3,108,759 2,306,224 ------------ ------------ ------------ ------------ ------------ Loans and leases, gross 25,886,238 23,069,914 22,487,532 20,696,001 18,776,294 Unearned income (922,618) (713,390) (588,578) (488,121) (353,619) Reserve for credit losses (366,640) (331,621) (312,264) (284,284) (271,006) ------------ ------------ ------------ ------------ ------------ Loans and leases, net $ 24,596,980 22,024,903 21,586,690 19,923,596 18,151,669 ============ ============ ============ ============ ============ Loans held for sale $ 297,277 588,972 315,156 93,279 390,938 ============ ============ ============ ============ ============
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The remaining maturities of the loan portfolio distributed to reflect cash flows (excluding residential mortgages, consumer loans and lease financing) at December 31, 1999, based on scheduled repayments and the sensitivity of loans to interest rate changes for loans due after one year was as follows ($000's):
Commercial, Financial and Real Estate Real Estate Agricultural Construction Commercial Loans Loans Loans Total ---------- ---------- ---------- ---------- Due in one year or less $2,952,754 497,633 612,130 $4,062,517 Due after one year through five years 2,495,053 293,340 1,208,109 3,996,502 Due after five years 758,905 276,914 831,139 1,866,958 ---------- ---------- ---------- ---------- Total $6,206,712 $1,067,887 $2,651,378 $9,925,977 ========== ========== ========== ========== LOANS DUE AFTER ONE YEAR: Predetermined interest rate $2,364,136 418,006 1,609,838 $4,391,980 ========== ========== ========== ========== Floating or adjustable interest rate $ 889,822 152,248 429,410 $1,471,480 ========== ========== ========== ==========
10 11 RISK ELEMENTS Interest on loans is normally accrued at the rate agreed upon at the time each loan was negotiated. It is the Registrant's policy to discontinue accrual of interest on commercial, construction and mortgage loans when there is a clear indication the borrower's cash flow may not be sufficient to meet payments as they become due. Loans, other than consumer loans, are placed on nonaccrual status when principal or interest is past due ninety days or more, unless the loan is well secured and in the process of collection. The following table presents data concerning loans and leases at risk as of December 31, ($000's)
1999 1998 1997 1996 1995 ------- -------- -------- ------- ------ Nonaccrual loans and leases $66,805 77,177 102,059 98,819 107,638 Loans and leases contractually past due 90 days or more as to principal, interest, or rental payments $68,233 87,002 55,779 48,060 25,893 Loans and leases renegotiated to provide a reduction or deferral of interest, principal or rental payments because of the financial position deterioration of the borrower $ -- 1,195 1,795 3,062 2,274
As of December 31, 1999, loans and leases of $39,574 were currently performing in accordance with contractual terms where there are serious doubts as to the ability of the borrower to comply with such terms. For the years 1999, 1998 and 1997, interest income of $839, $2,343 and 2,388, respectively was recorded on nonaccrual and renegotiated loans and leases. Additional interest income of $5,447, $6,063 and $8,100 would have been recorded if the nonaccrual and renegotiated loans and leases had been current in accordance with their original terms. 11 12 SUMMARY OF CREDIT LOSS EXPERIENCE A summary of the activity in the reserve for credit losses arising from provisions charged to operations, losses charged off and recoveries of losses previously charged off was as follows ($000's):
1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Loans and leases outstanding at December 31 $ 24,963,620 22,356,524 21,898,954 20,207,880 18,422,675 ============ ============ ============ ============ ============ Loans held for sale 297,277 588,972 315,156 93,279 390,938 Average loans and leases outstanding 24,382,553 22,542,611 21,129,681 19,632,693 17,641,384 ============ ============ ============ ============ ============ Reserve for credit losses, January 1 $ 331,621 312,264 284,284 271,006 245,925 ------------ ------------ ------------ ------------ ------------ Losses charged off: Commercial, financial and agricultural loans (49,684) (44,526) (16,347) (16,826) (10,163) Real estate - construction loans (539) (953) (243) (147) (69) Real estate - mortgage loans (2,636) (9,795) (11,894) (9,005) (8,143) Consumer loans (64,176) (58,947) (70,188) (64,293) (34,639) Lease financing (37,233) (28,570) (23,034) (13,285) (5,084) ------------ ------------ ------------ ------------ ------------ Total losses (154,268) (142,791) (121,706) (103,556) (58,098) ------------ ------------ ------------ ------------ ------------ Recoveries of losses previously charged off: Commercial, financial and agricultural loans 10,459 4,338 4,094 4,989 2,808 Real estate - construction loans -- 75 293 -- 63 Real estate - mortgage loans 678 2,893 2,392 3,545 3,108 Consumer loans 19,468 20,044 17,440 14,844 9,885 Lease financing 11,855 5,612 6,315 2,866 1,393 ------------ ------------ ------------ ------------ ------------ Total recoveries 42,460 32,962 30,534 26,244 17,257 ------------ ------------ ------------ ------------ ------------ Net losses charged off: Commercial, financial and agricultural loans (39,225) (40,188) (12,253) (11,837) (7,355) Real estate - construction loans (539) (878) 50 (147) (6) Real estate - mortgage loans (1,958) (6,902) (9,502) (5,460) (5,035) Consumer loans (44,708) (38,903) (52,748) (49,449) (24,754) Lease financing (25,378) (22,958) (16,719) (10,419) (3,691) ------------ ------------ ------------ ------------ ------------ Total net losses charged off (111,808) (109,829) (91,172) (77,312) (40,841) ------------ ------------ ------------ ------------ ------------ Letter of credit Reserve of acquired institutions and other 12,770 5,697 2,206 7,710 11,103 Provision charged to operations 134,057 123,489 116,946 82,880 54,819 Reserve for credit losses, ------------ ------------ ------------ ------------ ------------ December 31 $ 366,640 331,621 312,264 284,284 271,006 ============ ============ ============ ============ ============ Reserve as a percent of loans and leases outstanding 1.47% 1.48% 1.43% 1.41% 1.47%
12 13
SUMMARY OF CREDIT LOSS EXPERIENCE, CONTINUED Allocation of reserve for credit losses, December 31: 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Commercial, financial and agricultural loans $143,676 83,264 117,569 124,563 151,003 Real estate - construction loans 8,895 5,001 7,454 2,373 1,804 Real estate - mortgage loans 13,214 1,750 2,110 2,360 2,439 Consumer loans 105,187 149,750 116,988 103,092 79,913 Lease financing 95,668 91,856 68,143 51,896 35,847 -------- -------- -------- -------- -------- Total reserve for credit losses $366,640 331,621 312,264 284,284 271,006 ======== ======== ======== ======== ========
The reserve for credit losses is general in nature and is available to absorb losses from any portion of the loan and lease portfolio. As of December 31, 1999, the allowance for loan losses was $367 million or 1.47 percent of total loans, net of unearned interest. This compares to $332 million or 1.48 percent of total loans, net of unearned interest, as of December 31, 1998. The decline in this ratio was due to an improvement in the credit quality of consumer loans, as exhibited by the decrease of nonaccrual loans and leases from $77.1 million at December 31, 1998 to $66.8 million at December 31, 1999. Total underperforming assets also decreased from $177.9 million, or .80% of total loans and leases outstanding, at December 31, 1998 to $145.5 million, or .58% of total loans and leases outstanding, at December 31, 1999. As shown in the table above, the impact of the above improvement in underperforming assets was partially offset by an increase in commercial exposure through acquisitions. The allocation of the allowance for loan and lease losses for consumer and commercial mortgages increased from $1.8 million, or 1% of the allowance for loan and lease losses, at December 31, 1998 to $13.2 million, or 4% of the allowance for loan and lease losses, December 31, 1999. The allocation of the allowance for loan and lease losses for commercial loans increased from $83.3 million, or 25% of the allowance for loan and lease losses, at December 31, 1998 to $143.7 million, or 39% of the allowance for loan and lease losses, at December 31, 1999. Net charge-offs increased in 1999 to $112 million from $110 million in 1998. In 1999 and 1998, the Registrant recorded $26.2 million and $16.7 million, respectively of merger-related charge-offs in connection with acquisitions of Peoples and CNB in 1999 and CitFed Bancorp, Inc. and State Savings Company in 1998. Merger-related charge-offs occurred due to the change in intent of the management regarding the work-out strategy for certain acquired problem loans and to conform the acquired entities' charge-off practices to those of the Registrant. Excluding merger-related charge-offs in 1999 and 1998, net charge-offs declined to $85 million from $93 million. 13 14 SUMMARY OF CREDIT LOSS EXPERIENCE, CONTINUED The distribution of loans and leases by type and the ratio of net charge-offs to average loans and leases outstanding was as follows:
1999 1998 1997 1996 1995 ------- ------ ------- ------- ------- Percentage of loans and leases to total loans and leases at December 31: Commercial, financial and agricultural loans 24.0 24.1 25.6 25.0 25.2 Real estate - construction loans 4.1 3.6 3.2 3.6 3.3 Real estate - mortgage loans 28.8 34.2 37.1 38.8 37.5 Consumer loans 20.4 19.3 18.0 17.6 21.7 Lease financing 22.7 18.8 16.1 15.0 12.3 ------- ------ ------- ------- ------- Total 100.0 100.0 100.0 100.0 100.0 ======= ======= ======= ======= ======= Ratio of net charge-offs during year to average loans and leases outstanding during year: Commercial, financial and agricultural loans 0.67% 0.71% 0.22% 0.24% 0.17% Real estate - construction loans 0.06% 0.11% -0.01% 0.02% 0.00% Real estate - mortgage loans 0.03% 0.09% 0.12% 0.07% 0.07% Consumer loans 0.92% 0.91% 1.37% 1.28% 0.67% Lease financing 0.59% 0.68% 0.58% 0.45% 0.21% Weighted Average Ratio 0.36% 0.47% 0.43% 0.40% 0.23%
14 15 RESERVE FOR CREDIT LOSSES The reserve for credit losses is maintained at a level management considers to be adequate to absorb probable loan and lease losses inherent in the portfolio, based on evaluations of the collectibility and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the reserve. Provisions for credit losses are based on management's review of the historical credit loss experience and such factors which, in management's judgement, deserve consideration under existing economic conditions in estimating potential credit losses. The reserve is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. In determining the appropriate level of reserves, the Registrant estimates losses using a range derived from "base" and "conservative" estimates. The Registrant's methodology for assessing the appropriate reserve level consists of several key elements. Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Registrant. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations. The loss rates are derived from a migration analysis, which computes the net charge-offs experience sustained on loans according to their internal risk grade. These grades encompass nine categories that define a borrower's ability to repay their loan obligations. Homogenous loans, such as consumer installment, residential mortgage loans, and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category. Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management's judgement, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Registrant's internal credit examiners. An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans. Included in the review of individual loans are those that are impaired as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". Any reserves for impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or fair value of the underlying collateral. The Registrant evaluates the collectibility of both principal and interest when assessing the need for loss accrual. Reserves on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. The Registrant's primary market area for lending in Ohio, Kentucky, Indiana, Florida, Michigan, Illinois and Arizona. When evaluating the adequacy of reserves, consideration is given to this regional geographic concentration and the closely-associated effect changing economic conditions has on the Registrant's customers. Based on the procedures discussed above, management is of the opinion the reserve of $366,640,000 was adequate to absorb estimated credit losses associated with the loan and lease portfolio at December 31, 1999. 15 16 MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000 AND OVER AT DECEMBER 31, 1999 ($000'S)
Three months or less $ 847,585 Over three months through six months 185,402 Over six months through twelve months 153,817 Over twelve months 105,882 ---------------- Total certificates - $100,000 and over $ 1,292,686 ================
Note: Foreign office deposits totaling $2,150,352 are denominated in amounts greater than $100,000. RETURN ON EQUITY AND ASSETS The following table presents certain operating ratios: 1999(1) 1998(2) 1997 ------- ------- -------- Return on assets (a) 1.68% 1.51 1.57 Return on equity (b) 16.9% 15.4 17.2 Dividend payout ratio (c) 40.9% 39.9 32.5 Equity to assets ratio (d) 9.95% 9.80 9.16 (a) net income divided by average assets (b) net income divided by average equity (c) dividends declared per share divided by diluted earnings per share (d) average equity divided by average assets 1.Certain 1999 ratios and statistics include merger-related items of $108.4 million pretax ($83.8 million after tax, or $.27 per share). For comparability, excluding the merger-related items, return on average assets, return on average equity and the dividend payout ratio for 1999 would have been 1.89%, 19.0% and 36.5%, respectively. 2. Certain 1998 ratios and statistics include merger-related items of $138 million pretax ($98.7 million after tax, or $.32 per share). For comparability, excluding the merger-related items, return on average assets, return on average equity and the dividend payout ratio for 1998 would have been 1.78%, 18.2% and 33.8%, respectively. 16 17 PART I ITEM 2. PROPERTIES - ------------------- The Registrant's executive offices and the main office of the Bank are located on Fountain Square Plaza in downtown Cincinnati, Ohio, located in a 32-story office tower and a 5-story office building with attached parking garage known as the Fifth Third Center and the William S. Rowe Building, respectively. One of the subsidiaries of the Registrant owns 100 percent of these buildings. At December 31, 1999, the Registrant, through its subsidiary banks, five located in Ohio, two in Kentucky, one in each of Indiana, Arizona, Michigan and Florida, operated 648 banking centers, of which 407 were owned and 241 were leased. The properties owned are free from mortgages and encumbrances. On March 17, 2000, the Indiana subsidiary bank was merged into the Michigan subsidiary bank. Management's Editorial (pages 4-11) and Note 5 (page 20) of Notes to Consolidated Financial Statements of the Registrant's 1999 Annual Report to Shareholders is incorporated herein by reference and attached to this filing as Exhibit 13. ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Registrant and its subsidiaries are not parties to any material legal proceedings other than routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ None. 17 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS - ----------------------------------------------------------------------------- The information required by this item is incorporated herein by reference to Financial Highlights (page 1) of Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The information required by this item is incorporated herein by reference to Note 1 (pages 17 -18) and Note 18 (page 25 -26) of Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (pages 39) of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS - ------------- Year 2000 Readiness - ------------------- The Registrant completed the awareness, assessment, renovation, integration and interface testing, validation and implementation efforts for the Year 2000 (Y2K) date change. This effort included both internal and external resources to identify and remediate all information technology systems and computer chip embedded functions including the Y2K efforts of critical business partners, vendors and service suppliers. The Registrant's efforts were conducted in accordance with the guidelines provided by the Federal Financial Institutions Examination Council (FFIEC). Because internal staff largely completed the Y2K compliance effort, the Registrant did not incur significant costs from outside contractors. To date, the Registrant has spent under $10 million. All but immaterial amounts of these costs are internal costs, related to the lost opportunity of allocating time of the internal staff elsewhere. The costs also include all software, hardware and labor costs. The Registrant's information technology systems, hardware functions and business critical functions and services are operating without any Y2K problems. The Registrant is not aware of any significant Y2K related problems experienced by its vendors or service suppliers. The Registrant believes all its critical systems are Y2K ready. However, there is no guarantee that problems will not arise in the future. The Registrant has contingency plans to be implemented if required, should a significant problem occur. Contingency plans for critical business partners were also developed. The Federal Reserve, which is the Registrant's primary regulator, includes a review of the risk assessments and contingency plans in its quarterly examinations of the Registrant. Thus, the Registrant believes that the risk related to future exposure of Y2K issues is minimal and will not have a material impact on operations. 18 19 PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS (CONTINUED) - ------------------------- Additional Management's Discussion and Analysis information required by this item is incorporated herein by reference to pages 31 through 39 of Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- The information required by this item is incorporated herein by reference to page 38 of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The information required by this item is incorporated herein by reference to pages 13 through 30 of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------------------------------------------------------------------------ FINANCIAL DISCLOSURE - -------------------- None. 19 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------ The names, ages and positions of the Executive Officers of the Registrant as of February 1, 2000 are listed below along with their business experience during the past 5 years. Officers are appointed annually by the Board of Directors at the meeting of Directors immediately following the Annual Meeting of Shareholders.
CURRENT POSITION AND NAME AND AGE BUSINESS EXPERIENCE DURING PAST 5 YEARS - ------------ --------------------------------------- George A. Schaefer, Jr., 54 PRESIDENT AND CEO. President and Chief Executive Officer of the Registrant and Fifth Third Bank. Neal E. Arnold, 40 EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER. Executive Vice President of the Registrant and Fifth Third Bank since December 1998. Chief Financial Officer of the Registrant and Fifth Third Bank since June 1997. Mr. Arnold has been the Treasurer of the Registrant and Fifth Third Bank. Previously, Mr. Arnold was Treasurer and Senior Vice President of Fifth Third Bank. Michael D. Baker, 49 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Registrant and Fifth Third Bank since August 1995. Previously, Mr. Baker was Senior Vice President of the Registrant since March 1993, and of Fifth Third Bank. Barry L. Boerstler, 52 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Registrant and Fifth Third Bank since September 1999. Mr. Boerstler was Senior Vice President of the Registrant since December 1997 and of Fifth Third Bank. Previously, Mr. Boerstler was a Vice President of Fifth Third Bank.
20 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) - ------------------------------------------------------------------------
CURRENT POSITION AND NAME AND AGE BUSINESS EXPERIENCE DURING PAST 5 YEARS - ------------ --------------------------------------- James J. Hudepohl, 47 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Registrant and Fifth Third Bank since January 1997. Previously, Mr. Hudepohl was Senior Vice President of Fifth Third Bank. Michael K. Keating, 44 EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY. Executive Vice President of the Registrant and Fifth Third Bank since August 1995 and Secretary of the Registrant and Fifth Third Bank since January 1994. Previously, Mr. Keating was Senior Vice President and General Counsel of the Registrant since March 1993, and Senior Vice President and Counsel of Fifth Third Bank. Robert P. Niehaus, 53 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Registrant and Fifth Third Bank since August 1995. Previously, Mr. Niehaus was Senior Vice President of the Registrant since March 1993, and Senior Vice President of Fifth Third Bank. Stephen J. Schrantz, 50 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Registrant and Fifth Third Bank. Gerald L. Wissel, 43 EXECUTIVE VICE PRESIDENT. Executive Vice President of Fifth Third Bank since January 1997. Auditor of the Registrant and Fifth Third Bank. Previously, Mr. Wissel was Senior Vice President of Fifth Third Bank.
21 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) - ------------------------------------------------------------------------
CURRENT POSITION AND NAME AND AGE BUSINESS EXPERIENCE DURING PAST 5 YEARS - ------------ --------------------------------------- Robert J. King, Jr., 44 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Registrant since June 1997. Vice Chairman of Fifth Third Bank, Northwestern Ohio, N.A. and President and CEO of Fifth Third Bank Northeast. Previously, Mr. King was President and CEO of Fifth Third Bank, Northwestern Ohio, N.A. Mr. King was Senior Vice President of the Registrant since March 1995. James R. Gaunt, 54 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Registrant since June 1997. Senior Vice President of the Registrant since March 1994, and President and CEO of Fifth Third Bank of Kentucky, Inc. since August 1994. Previously, Mr. Gaunt was Senior Vice President of the Registrant and Fifth Third Bank. Paul L. Reynolds, 38 EXECUTIVE VICE PRESIDENT, ASSISTANT SECRETARY. Executive Vice President of the Registrant since September 1999. Previously, Senior Vice President of the Registrant and Fifth Third Bank since March 1997. Assistant Secretary of the Registrant since March 1995, General Counsel and Assistant Secretary of Fifth Third Bank since January 1995. Roger W. Dean, 37 CONTROLLER. Senior Vice President of the Registrant and Fifth Third Bank since March 1997. Controller of the Registrant and Fifth Third Bank since June 1993. Previously, Mr. Dean was Vice President of the Registrant and Fifth Third Bank.
The information required by this item concerning Directors is incorporated herein by reference under the caption "ELECTION OF DIRECTORS" (pages 2 - 6) of the Registrant's 2000 Proxy Statement. 22 23 ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The information required by this item is incorporated herein by reference under the caption "EXECUTIVE COMPENSATION" (pages 7 -13) of the Registrant's 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The information required by this item is incorporated herein by reference under the captions "CERTAIN BENEFICIAL OWNERS, ELECTION OF DIRECTORS AND EXECUTIVE COMPENSATION" (pages 1- 13) of the Registrant's 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information required by this item is incorporated herein by reference under the caption "CERTAIN TRANSACTIONS" (page 13) of the Registrant's 2000 Proxy Statement. 23 24
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- a) Documents Filed as Part of the Report Page ---- 1. Index to Financial Statements Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 * Consolidated Balance Sheets, December 31, 1999 and 1998 * Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 * Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 * Notes to Consolidated Financial Statements * * Incorporated by reference to pages 13 through 29 of the Registrant's 1999 Annual Report to Shareholders attached to this filing as Exhibit 13. 2. Financial Statement Schedules The schedules for Registrant and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto.
24 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------- (CONTINUED) - ----------- 3. Exhibits Exhibit No. ----------- 3.1 Code of Regulations of Fifth Third Bancorp, as amended (a) 3.2 Second Amended Articles of Incorporation of Fifth Third Bancorp, as amended (b) 4(a) Junior Subordinated Indenture, dated as of March 20, 1997 between Fifth Third Bancorp and Wilmington Trust Company, as Debenture Trustee (c) 4(b) Certificate Representing the 8.136% Junior Subordinated Deferrable Interest Debentures, Series A, of Fifth Third Bancorp (c) 4(c) Amended and Restated Trust Agreement, dated as of March 20, 1997 of Fifth Third Capital Trust II, among Fifth Third Bancorp, as Depositor, Wilmington Trust Company, as Property Trustee, and the Administrative Trustees name therein (c) 4(d) Certificate Representing the 8.136% Capital Securities, Series A, of Fifth Third Capital Trust I (c) 4(e) Guarantee Agreement, dated as of March 20, 1997 between Fifth Third Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee (c) 4(f) Agreement as to Expense and Liabilities, dated as of March 20, 1997 between Fifth Third Bancorp, as the holder of the Common Securities of Fifth Third Capital Trust I and Fifth Third Capital Trust II (c) 10(a) Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-Employee Directors (d)+ 25 26 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - --------------------------------------------------------------------------- (CONTINUED) - ----------- 3. Exhibits Exhibit No. ----------- 10(b) Fifth Third Bancorp 1990 Stock Option Plan (e)+ 10(c) Fifth Third Bancorp 1987 Stock Option Plan (f)+ 10(d) Indenture effective November 19, 1992 between Fifth Third Bancorp, Issuer and NBD Bank, N.A., Trustee (g) 10(e) Fifth Third Bancorp 1993 Discount Stock Purchase Plan (h)+ 10(f) Fifth Third Bancorp Amended and Restated Stock Incentive Plan for selected Executive Officers, Employees and Directors of The Cumberland Federal Bancorporation, Inc. (i)+ 10(g) Fifth Third Bancorp Master Profit Sharing Plan (j)+ 10(h) Fifth Third Bancorp Amended and Restated Stock Option and Incentive Plan for Selected Executive Officers, Employees and Directors of Falls Financial, Inc. (k)+ 10(i) Fifth Third Bancorp Amended 1993 Discount Stock Purchase Plan (l)+ 10(j) Fifth Third Bancorp 1998 Long-Term Incentive Stock Plan (m)+ 10(k) Fifth Third Bancorp Variable Compensation Plan (n)+ 10(l) CitFed Bancorp, Inc. Amended and Restated 1991 Stock Option and Incentive Plan (o)+ 10(m) Fifth Third Bancorp Non-qualified Deferred Compensation Plan. (p)+ 10(n) Emerald Financial Corp. 1994 Long Term Incentive Plan and Emerald Financial Corp. 1998 Stock Option and Incentive Plan. (q)+ 26 27 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (CONTINUED) - ----------- 3. Exhibits Exhibit No. ----------- 10(o) CNB Bancshares, Inc. 1999 Stock Incentive Plan, 1995 Stock Incentive Plan, 1992 Stock Incentive Plan and Associate Stock Option Plan; King City Federal Savings Bank 1986 Stock Option and Incentive Plan; Indiana Bancshares, Inc. 1990 Stock Option Plan; National Bancorp Stock Option Plan; Indiana Federal Corporation 1986 Stock Option and Incentive Plan; and UF Bancorp, Inc. 1991 Stock Option and Incentive Plan (r) + 10(p) Peoples Bank Corporation of Indianapolis 1998 Stock Option Plan; Peoples Bank Corporation of Indianapolis Stock Option Plan; and Peoples Bank Corporation of Indianapolis Directors Stock Option Plan. (s) + 11 Computation of Consolidated Earnings Per Share for the Years Ended December 31, 1999, 1998, 1997, 1996 and 1995 13 Fifth Third Bancorp 1999 Annual Report to Shareholders 21 Fifth Third Bancorp Subsidiaries 23 Independent Auditors' Consent 27.1 Financial Data Schedule for the Year Ended December 31, 1999 27.2 Financial Data Schedule restated for the Three Months Ended March 31, 1999, for the Six Months Ended June 30, 1999, and for the Nine Months Ended September 30, 1999. 27.3 Financial Data Schedules restated for the Year Ended December 31, 1998 and for the Year Ended December 31, 1997. 27.4 Financial Data Schedule restated for the Three Months Ended March 31, 1998, for the Six Months Ended June 30, 1998 and for the Nine Months Ended September 30, 1998. + Denotes management contract or compensatory plan or arrangement. b) Reports on Form 8-K The Registrant filed a report on Form 8-K dated December 17, 1999, related to the unaudited condensed financial statements and supplemental financial data for the years ended December 31, 1998, 1997, 1996, 1995, 1994 and for the three months ended September 30, 1999, June 30, 1999, March 31, 1999, December 31, 1998, September 30, 1998, June 30, 1998 and March 31, 1998. The unaudited condensed financial statements and supplemental financial data preliminarily reflected the effect of the Registrant's acquisitions, as if all the pooled entities had been combined for all the periods presented. 27 28 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (CONTINUED) - ----------- - ----------------------- (a) Incorporated by reference to Registrant's Registration Statement, on Form S-4, Registration No. 33-63966. (b) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (c) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission on March 26, 1997, a Form 8-K Current Report. (d) Incorporated by reference to Registrant's Form 10-K Annual Report by reference to Form 10-K filed for fiscal year ended December 31, 1985. (e) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-34075. (f) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-13252. (g) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission on November 18, 1992, a Form 8-K Current Report dated November 16, 1992 and as Exhibit 4.1 to a Registration Statement on Form S-3, Registration No. 33-54134. (h) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-60474. (i) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-55223. (j) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-55553. (k) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-61149. 28 29 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (CONTINUED) - ----------- (l) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (m) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 333-58249. (n) Incorporated by reference to Registrant's Proxy Statement dated February 9, 1998. (o) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 333-48049 and by reference to CitFed Bancorp's Form 10-K for the fiscal year ended March 31, 1996. (p) Filed with the Securities and Exchange Commission as Exhibit 10.4 to a Registration Statement on Form S-4, Registration No. 33-21139. (q) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-4, Registration No. 333-77293 and by reference to Emerald Financial Corporation Form 10-K for the fiscal year ended March 31, 1999 and Form S-8 filed April 30, 1998. (r) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-4, Registration No. 333-84955 and by reference to CNB Bancshares Form 10-K, as amended, for the fiscal year ended December 31, 1998. (s) Incorporated by reference to Peoples Bank Corporation of Indianapolis filings with the Securities and Exchange Commission as an Exhibit to Form 10K for each of the fiscal years ended December 31, 1998, December 31, 1995, and December 31, 1996, respectively. 29 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIFTH THIRD BANCORP (Registrant) /s/George A. Schaefer, Jr. March 21, 2000 - ------------------------------- George A. Schaefer, Jr. President and CEO (Principal Executive Officer) Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed on March 21, 2000 by the following persons on behalf of the Registrant and in the capacities indicated. /s/Neal E. Arnold /s/Roger W. Dean /s/Robert B. Morgan - ------------------------------- ----------------------------- -------------------------- Neal E. Arnold Roger W. Dean Robert B. Morgan Executive Vice President and CFO Controller Director (Principal Financial Officer) (Principal Accounting Officer) /s/Darryl F. Allen /s/Joan R. Herschede /s/David E. Reese - ------------------------------- ----------------------------- -------------------------- Darryl F. Allen Joan R. Herschede David E. Reese Director Director Director /s/John F. Barrett /s/Allen M. Hill /s/James E. Rogers - ------------------------------- ----------------------------- -------------------------- John F. Barrett Allen M. Hill James E. Rogers Director Director Director /s/Gerald V. Dirvin /s/William G. Kagler /s/Brian H. Rowe - ------------------------------- ----------------------------- -------------------------- Gerald V. Dirvin William G. Kagler Brian H. Rowe Director Director Director /s/Thomas B. Donnell /s/James D. Kiggen /s/Donald B. Shackelford - ------------------------------- ----------------------------- -------------------------- Thomas B. Donnell James D. Kiggen Donald B. Shackelford Director Director Director /s/Richard T. Farmer /s/Jerry L. Kirby /s/George A. Schaefer, Jr. - ------------------------------- ----------------------------- -------------------------- Richard T. Farmer Jerry L. Kirby George A. Schaefer, Jr. Director Director Director, President and CEO (Principal Executive Officer) /s/Joseph H. Head, Jr. /s/Mitchel D. Livingston, Ph. D. /s/John J. Schiff, Jr. - ------------------------------- -------------------------------- -------------------------- Joseph H. Head, Jr. Mitchel D. Livingston, Ph. D. John J. Schiff, Jr. Director Director Director
31 31 /s/Dennis J. Sullivan, Jr. /s/Dudley S. Taft /s/John J. Schiff, Jr. - ------------------------------- -------------------------- ----------------------- Dennis J. Sullivan, Jr. Dudley S. Taft John J. Schiff, Jr. Director Director Director /s/Alton C. Wendzel /s/Robert L. Koch II /s/Thomas W. Traylor - ------------------------------- -------------------------- ----------------------- Alton C. Wendzel Robert L. Koch II Thomas W. Traylor Director Director Director
32 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 FIFTH THIRD BANCORP COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31
1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- NET INCOME $668,229 546,512 529,379 442,876 389,017 ======== ======== ======== ======== ======== EARNINGS PER SHARE: WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (a) 306,119 301,335 297,864 299,175 285,501 ======== ======== ======== ======== ======== PER SHARE (NET INCOME DIVIDED BY THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING) $ 2.18 1.81 1.78 1.48 1.36 ======== ======== ======== ======== ======== DILUTED EARNINGS PER SHARE: NET INCOME $668,229 546,512 529,379 442,876 389,017 ADD - INTEREST ON 6% CONVERTIBLE SUBORDINATED NOTES DUE 2028, NET OF APPLICABLE INCOME TAXES 6,728 3,364 0 0 0 -------- -------- -------- -------- -------- ADJUSTED NET INCOME $674,957 549,876 529,379 442,876 389,017 ======== ======== ======== ======== ======== ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - AFTER GIVING EFFECT TO THE CONVERSION OF STOCK OPTIONS AND CONVERTIBLE SUBORDINATED NOTES (a) 314,570 308,752 302,827 305,761 295,252 ======== ======== ======== ======== ======== PER SHARE (ADJUSTED NET INCOME DIVIDED BY THE ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING) $ 2.15 1.78 1.75 1.45 1.32 ======== ======== ======== ======== ======== - --------------------------------------------------------- (a) Per share amounts and average shares outstanding have been adjusted for the three-for-two stock split effected in the form of a stock dividend declared March 17, 1998 and distributed April 15, 1998.
EX-13 3 EXHIBIT 13 1 Exhibit 13 1999 ANNUAL REPORT [NEWSPAPER GRAPHICS] QUALITY GROWTH [FIFTH THIRD BANK LOGO] 2 CORPORATE PROFILE CORPORATE PROFILE Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. Fifth Third operates 14 affiliate banks principally in Ohio, Kentucky, Indiana, Florida and Arizona, and provides a broad array of products and services through four primary businesses: Commercial Banking, Retail Banking, Investment Advisors and Midwest Payment Systems, the bank's data processing subsidiary. With $42 billion in assets, we are among the top 30 largest bank holding companies in the country and among the 15 largest in market capitalization. Corporate Office Fifth Third Center Cincinnati, Ohio 45263 (513) 579-5300 INVESTMENT QUALITIES If you had invested $1,000 in Fifth Third stock in 1979, it would have grown to $163,611 by December 31, 1999. Since 1979, Fifth Third Bancorp has: - Posted consecutive increased earnings per share and dividend growth - Increased earnings at an average rate of 17.5% - Outperformed the Standard & Poor's 500 13-fold - Grown one share of stock to 51 shares, due to nine stock splits since 1983 CORPORATE OFFICE Fifth Third Center Cincinnati, Ohio 45263 (513) 579-5300 WEB SITE www.53.com INVESTOR RELATIONS Neal E. Arnold, Executive Vice President & Chief Financial Officer (513) 579-4356 (513) 579-6246 (facsimile) investorrelations.cincinnati@53.com TRANSFER AGENT/ SHAREHOLDER RELATIONS Fifth Third Bank Corporate Trust Services, Mail Drop 10AT66-3212 Fifth Third Center, Cincinnati, Ohio 45263 (800) 837-2755 (513) 579-5320 (outside continental U.S.) 8 a.m. - 5 p.m. Eastern Standard Time PRESS RELEASES For faxed copies of current press releases, call (800) 758-5804, ext. 281775 TABLE OF CONTENTS 2 President's Letter 4 Management Editorial 13 Consolidated Statements of Income 14 Consolidated Balance Sheets 15 Consolidated Statements of Changes in Shareholders' Equity 16 Consolidated Statements of Cash Flows 17 Notes to Consolidated Financial Statements 30 Independent Auditors' Repo 31 Management's Discussion and Analysis of Financial Condition and Results of Operations 39 Consolidated Six Year Summary of Operations, Condensed Consolidated Balance Sheet Information and Summarized Quarterly Financial Information 40 Consolidated Ten Year Comparison 3 FINANCIAL HIGHLIGHTS
FINANCIAL HIGHLIGHTS 1999 1998 % CHANGE - ------------------------------------------------------------------------------------------------------------ EARNINGS AND DIVIDENDS ($ IN MILLIONS) Operating Earnings (a) $ 752 645 16.6 Net Income 668 547 22.1 Cash Dividends Declared 248 187 32.6 - ------------------------------------------------------------------------------------------------------------ PER SHARE Diluted Operating Earnings (a) 2.41 2.10 14.8 Earnings 2.18 1.81 20.4 Diluted Earnings 2.15 1.78 20.8 Cash Dividends Declared .88 .71 23.9 Year-End Book Value 13.20 12.56 5.1 Year-End Market Price 73.38 71.31 2.9 - ------------------------------------------------------------------------------------------------------------ AT YEAR END ($ IN MILLIONS) Assets $ 41,589 37,092 12.1 Loans and Leases 24,964 22,357 11.7 Deposits 25,886 24,496 5.7 Shareholders' Equity 4,077 3,795 7.4 Market Capitalization 22,666 21,540 5.2 - ------------------------------------------------------------------------------------------------------------ KEY RATIOS Return on Average Assets (a) 1.89% 1.78 6.2 Return on Average Equity (a) 19.0 18.2 4.4 Overhead Ratio (a)(b) 44.1 45.3 (2.6) Net Interest Margin 3.99 3.93 1.5 - ------------------------------------------------------------------------------------------------------------ Number of Shares 308,886,592 302,064,369 2.3 Number of Shareholders 35,277 32,909 7.2 Number of Banking Locations 648 631 2.7 Number of Full-Time Equivalent Employees 11,692 11,354 3.0 - ------------------------------------------------------------------------------------------------------------
(a) For comparability, certain ratios and statistics exclude merger-related items of $108.4 million pretax ($83.8 million after tax, or $.27 per share) for 1999 and merger-related items of $138 million pretax ($98.7 million after tax, or $.32 per share) for 1998. (b) Operating expenses divided by the sum of fully taxable equivalent net interest income and other operating income. FIFTH THIRD BANCORP SHAREHOLDER INFORMATION AND DEBT RATINGS
STOCK DATA DIVIDENDS PAID PER YEAR PERIOD HIGH LOW SHARE - ------------------------------------------------------------------------------------------------------------ 1999 FOURTH QUARTER $75.44 $57.88 $.24 THIRD QUARTER 69.88 58.63 .20 SECOND QUARTER 74.25 61.63 .20 FIRST QUARTER 75.44 62.38 .20 - ------------------------------------------------------------------------------------------------------------ 1998 Fourth Quarter $74.13 $50.31 $.17 Third Quarter 67.25 49.25 .17 Second Quarter 63.13 47.50 .17 First Quarter 58.83 49.50 .14 2/3 - ------------------------------------------------------------------------------------------------------------ The common stock of Fifth Third Bancorp is traded in the over-the-counter market and is listed under the symbol "FITB" on the Nasdaq National Market. - ------------------------------------------------------------------------------------------------------------
RATINGS STANDARD DUFF & MOODY'S & POOR'S FITCH PHELPS - ------------------------------------------------------------------------------------------------------------ FIFTH THIRD BANCORP Commercial Paper P1 A1+ F1+ Duff-1+ - ------------------------------------------------------------------------------------------------------------ FIFTH THIRD BANK-CINCINNATI Short-Term Deposit P1 A1+ F1+ Duff-1+ Long-Term Deposit Aa2 AA- AA+ AA - ------------------------------------------------------------------------------------------------------------- FIFTH THIRD BANKS OF NORTHWESTERN OHIO, N.A., WESTERN OHIO, CENTRAL OHIO, INDIANA, KENTUCKY, INC., AND NORTHERN KENTUCKY Short-Term Deposit P1 A1+ F1+ Duff-1+ Long-Term Deposit Aa3 AA- AA+ AA - --------------------------------------------------------------------------------------------------------------
4 LETTER FROM THE PRESIDENT QUALITY GROWTH FROM HARD WORKING PERFORMANCE Dear Shareholders and Friends: Nineteen ninety-nine was another outstanding year for Fifth Third. Diluted operating earnings per share rose 15% to $2.41, driven by operating earnings of $752 million, up 17% over 1998's $645 million. Return on average equity was 19% on an abundant capital base, while return on average assets was 1.89%. Our industry-leading efficiency ratio continued to improve to 44.1%. We are especially proud of our high ROE, ROA and efficiency this year because each was lowered slightly as we combined the pre-merger results of several acquisitions. In fact, in the third quarter of 1999, we achieved historic highs for ROA and ROE and our efficiency ratio dipped below 40%, a new milestone, before restatements for our most recent acquisitions. [PHOTO] Financial results for the year were highlighted by solid revenue growth, improved efficiency, a rock-solid balance sheet and solid, steadily improving credit quality. Fee income grew by 16%, fueled by double-digit revenue growth across all of our lines of business. Data processing led with a 28% increase in revenue driven by record credit card merchant processing volumes and higher EFT volume from debit card and ATM usage. Fifth Third, through its data processing subsidiary Midwest Payment Systems, ranks #1 and #6 in the nation, respectively, in EFT and merchant processing, handling over 3.7 billion electronic transactions in 1999. MPS' world-class capabilities as a transaction processor position us well to take advantage of the opportunities of e-commerce. Investment advisory income rose 22% on strong sales across all product lines. We are one of the largest money managers in the Midwest with over $167 billion in assets under care, $22 billion of which we manage. Net interest income rose 11% over 1998, highlighted by strong loan growth across all categories. For example, we sold over $2.4 billion in new direct installment loans through our Banking Centers this year, up 50% from last year's sales of $1.6 billion. Our web site, www.53.com, now has 115,000 active users, and with 300 new users per day, this is clearly a growing point of access for Fifth Third products and services. Commercial loans and leases outstanding grew 17% on strong performance in our affiliate bank markets. Overall, we were pleased with the quality growth and performance of each of our business lines in 1999. You can learn more about their successes in the sections that follow. In addition to core growth in our established markets, we successfully completed seven acquisitions -- more than any year in our history. This year's acquisitions of CNB Bancshares, Inc. and Peoples Bank Corporation of Indianapolis vaulted us to #3 market share in Indiana. Our 1998 acquisitions, along with the mergers of Emerald Financial and Enterprise Federal earlier this year, moved us to second in Ohio with over 10% market share. Most importantly, all were accomplished without sacrificing our financial performance. We intend to focus on execution and building relationships with our new customers to create a strong platform for future earnings opportunities in the tri-state area. We will add to existing markets in the area through aggressive selling and possibly fill-in acquisitions where they make sense, keeping in mind that "bigger isn't always better." I'd like to sincerely thank our employees and those welcomed through mergers for their efforts. Their hard work and dedication are the key to sustaining Fifth Third's financial performance through the integration, while making the transition as smooth as possible for our customers. As we continue to expand, one of the questions that our management team always faces is how to sustain Fifth Third's 5 growth company track record. Unlike most of our industry, we manage growth in a decentralized manner through separate affiliate banks in each of our major geographical regions. Each of our affiliates has a CEO who is accountable for everything that happens in their market, including delivering required net income growth for their affiliate. This ensures that sales efforts across our four lines of business are aligned and focused on each market's customers. To better understand the way we manage growth, it is worth mentioning that today, four of our affiliates, Western Ohio, Northeastern Ohio, Central Ohio and Central Indiana, each have about $3.5 billion in assets, which is the same size that our lead bank in Cincinnati was just 15 years ago in 1985. These affiliates are individually managed for growth, capitalizing on the benefits of several small companies, instead of a single large one. We continue to believe that this management approach is the best way to keep the company "small" and give more individual managers the opportunity to grow their own business. The challenge of growing successfully in all of our markets heightens our dedication to the communities we serve. This year, Fifth Third committed $9 billion to our communities through our unprecedented BLITZ (Building, Lending, Investments and Technology Zones) program. BLITZ is our promise to spark community development loans and programs, fund affordable mortgages and small business loans, and create computer centers with Internet access to address the needs of low- and moderate-income consumers and businesses. It was a great honor to receive several accolades from the investment community in 1999. Our strong financial performance earned us the #1 spot in Salomon Smith Barney's Top 50 Bank Annual in 1999 for an unprecedented eighth year in a row. And, among Moody's Investor Services Dividend Achievers we rose in the ranks to #6 out of 13,200 companies for consistency and growth rate of dividends. Last year was our 26th year of uninterrupted earnings increases, with the last 21 at a double-digit growth rate. It was also a year that bank stocks seemed to have fallen out of favor with investors, with some competitors stumbling. This year promises to be another year of rapid change. Technology, a new regulatory environment and intensified competition will present significant new challenges and opportunities. There has been a lot of speculation concerning recent banking legislation. While we are thankful for less governmental boundaries, we don't intend to rush haphazardly into "new worlds" with your money. We like the banking business and expect our management team to remain focused on what works. Times like this make us more wary and mindful than ever of our obligation to deliver consistent shareholder returns. We are accustomed to delivering profitable growth through varying economic conditions. I realize that our longstanding philosophy of simply executing on the basics better than anyone isn't particularly flashy in a period when some of our peers are making headlines with virtual banking and the value of "bigness," but it has served our shareholders well over the past 26 years. I sincerely thank our customers, employees, suppliers, members of our Boards and the communities we serve for their contributions to our 1999 success and their continued loyalty and support. As we move into 2000, all of us at Fifth Third will be working hard to deliver another year of consistent, quality growth for you. I look forward to reporting our accomplishments. Sincerely, /s/ George A. Schaefer, Jr. George A. Schaefer, Jr. President & CEO January 2000 [GRAPHS - ON SIDE OF PAGE] $1.12 $1.32 $1.55 $1.75 $2.10 $2.41 94 95 96 97 98 99 DILUTED EARNINGS PER SHARE Five Year Compound Growth Rate: 17% excludes SAIF and Merger Charges $.36 $.43 $.49 $.57 $.71 $.88 94 95 96 97 98 99 DIVIDENDS DECLARED PER SHARE Five Year Compound Growth Rate: 20% $24.8 $28.3 $33.1 $35.2 $37.1 $41.6 94 95 96 97 98 99 TOTAL ASSETS ($ IN BILLIONS) Five Year Compound Growth Rate: 11% $7.71 $9.15 $10.35 $11.28 $12.56 $13.20 94 95 96 97 98 99 BOOK VALUE PER SHARE Five Year Compound Growth Rate: 11% 3 6 RETAIL BANKING: - -------------------------------------------------------------------------------- WORKING HARD TO DELIVER CONVENIENCE Stop by any of our 650 Banking Centers or Bank Mart(R) locations in Kroger and TOPS grocery stores any day of the week and you'll find a front-line sales force focused on delivering convenient, smart banking and investment products and services. Visit Fifth Third Online(SM), our Internet banking and investment service, dial up Jeanie(R) Telephone Banking, breeze through a Quick Source(TM) location or stop by one of our 1,400 Jeanie ATMs, and the story's the same: great, quick service. Successful sales campaigns in our Banking Centers drove direct installment loan originations of $2.4 billion, a historic high for Fifth Third, and an increase of 50% over 1998. Our Banking Center sales team was also responsible for a 13% increase in average demand deposit and interest-bearing checking account [PHOTO - CAROLYN CORDELL, CUSTOMER - MAINEVILLE, OHIO] [TEXT IN PHOTO] Carolyn and George Cordell began their relationship with Fifth Third in 1977 when they built their home in Maineville. "When I walk in the door, I feel like I'm going to see a friend," Mrs. Cordell offers. George, a retired engineer from Procter & Gamble, and his wife, Carolyn, a retired nurse, bank with Landen Banking Center Manager Andrea Allen for their equity line, Club 53(g) account and credit cards. "It's a good feeling, and I wouldn't go anywhere else." 7 RETAIL BANKING SOLUTIONS balances and a 23% increase in fee income. By identifying customers' financial needs and matching them with Fifth Third products that best met those needs, we were also able to reach an all-time high of $3.1 billion for consumer leases of which auto leasing was the driving force. Fifth Third remained "your home for loans" in 1999 by originating over $4.8 billion in residential mortgages, solidifying our position as the leading home loan lender in Cincinnati, northern Kentucky, and western, northwestern and central Ohio. Our expanded mortgage loan portfolio is also an excellent source of cross-selling opportunities: 88% of our mortgage customers also have Fifth Third BillPayer 2000(R) automatic bill payment service, while 72% have checking accounts, 37% have direct loans and 31% have credit cards. Over 350,000 customers are now active Jeanie (R) enhanced debit card holders. This payment option continues to grow in popularity and debit cards generated $15.5 million in revenue -- an 80% increase! We also introduced a business debit card product which posted strong first-year results, while Fifth Third's retail sales team throughout our Banking Centers drove a 54% increase in sales of our family of credit card products. Fifth Third Online, now in its second year, drew over 530,000 visitors in 1999. With a more intuitive, action-oriented home page, customers now have easier access to their accounts for transferring funds, checking balances, tailoring statements, paying bills, applying for a credit card or loan and linking to Fifth Third's Online Investment Services, where they can make trades and get stock quotes. [NEWSPAPER ARTICLE] [GRAPH] $969 $778 $606 $547 $452 [ ] REVENUE $334 $281 $192 $171 $147 [ ] NET INCOME - ---------------------------------------- 99 98 97 96 95 RETAIL ($ IN MILLIONS) Our toll-free customer service phone line provided another point of access for sales and service. Fielding over 13 million calls, our Call Center staff capitalized on these opportunities to generate $145 million in sales, a 190% increase over 1998. As a result of our 1999 acquisitions, we now have a considerable market share in all of our major metropolitan areas. This positions us to strengthen our retail business even further by extending our many products and services to our new customers. The potential in our new markets is limitless as Fifth Third can now compete across all product categories in these cities. For our millions of customers, the message is clear: by delivering banking and investment products and services wherever and whenever needed, we are truly "Working Hard To Be The Only Bank You'll Ever Need(R). 5 8 COMMERCIAL BANKING: - -------------------------------------------------------------------------------- WORKING HARD TO BUILD RELATIONSHIPS Fifth Third's team of commercial bankers is committed to a single goal -- forging solid relationships with our business partners by matching outstanding services to their needs. Our products range from traditional funding for expansion, real estate and venture capital opportunities, to leasing, international finance, IPOs and closely-held services. In 1999, we significantly increased our market share in the Cincinnati area and capitalized on new opportunities resulting from recent acquisitions. The outstanding efforts of several of our affiliates, including Northern Kentucky, Northeastern Ohio and Central Ohio resulted in commercial banking revenue growth of 27%. Average commercial demand deposits increased 14%, average loan and lease outstandings grew 15% and net income was up by 44%. [TEXT IN PHOTO] Fifth Third provides lockbox services to the Cleveland Plain Dealer. With a daily ciruclation of 400,000. The "P.D." is the state's largest newspaper. Fifth Third Bank President & CEO Bob King, far right, checks out the day's news with Bob Long and Greg Kosch, Fifth Third Senior Vice President. [PHOTO OF ROBERT M. LONG, EXECUTIVE VICE PRESIDENT THE PLAIN DEALER, CLEVELAND] 9 COMMERCIAL BANKING SOLUTIONS Commercial Leasing continued to expand its delivery network with the opening of an eighth regional sales office in Houston. Leasing services are available throughout Fifth Third's core marketplace of Ohio, Kentucky, Indiana, Florida, Arizona and Michigan, as well as in Chicago, St. Louis, Omaha, Baltimore, Nashville and Pittsburgh. Expanded territories for marketing equipment financing, lease lines of credit, small-ticket and municipal leases, broker discount programs and other services drove a 19% growth in average outstandings, an important source of new fee income and higher-yielding assets. As the only bank in the region with offices in Europe and Asia, Fifth Third is the natural choice for local and regional customers with international business. Fifth Third offers a complete range of services to help our commercial customers, including expediting international payments, international receipts and automated letters of credit. This distinction has also made us a dominant provider of banking services to foreign-based companies operating in our markets. Foreign currency trading, together with letters of credit, trade finance and other related services fueled a 35% rise in related fee income. The purchase of Vanguard Financial added to our already considerable strength in commercial real estate development financing and created one of the leading mortgage companies in the Midwest: Fifth Third Real Estate Capital Markets Company. We now offer unsurpassed construction, mini-permanent and alternative real estate financing products with extended terms and amortization. With a servicing portfolio of $2.1 billion, we rank among the nation's top 30 commercial real estate financing companies. [NEWSPAPER ARTICLE] [GRAPH] $220 $270 $297 $378 $481 [ ] REVENUE $92 $106 $124 $135 $195 [ ] NET INCOME - ---------------------------------------- 95 96 97 98 99 COMMERCIAL ($ IN MILLIONS) Fifth Third Corporate Treasury Management offers a full line of cash management services, competitive prices and superior technology-based delivery. By continuing to simplify electronic banking for our domestic and international business customers, we forged several sizable new lockbox processing relationships with FORTUNE(R) 1000 companies. These partnerships, and the information technology products we provide, drove a 12% increase in fee income. As we begin a new year, we see tremendous potential in all our markets. Additions such as CNB Bancshares present us with a unique opportunity to further develop our comprehensive product offerings and expand the depth and breadth of our services through a sales force of experienced commercial lenders. With a proven strategy and a dedication to forging strong partnerships, we will continue to provide our customers with solutions that create lasting business relationships. 7 10 INVESTMENT ADVISORS: - -------------------------------------------------------------------------------- WORKING HARD TO BUILD WEALTH Fifth Third Investment Advisors is in the business of managing money for individuals, companies and not-for-profit organizations. Driven by a philosophy of "consistent, quality growth," our seasoned professionals focus on investing in companies that are growing and have the potential to do so consistently. One of the largest money managers in the Midwest, Fifth Third has over $167 billion in assets under care, of which we manage $22 billion for personal, institutional and not-for-profit clients. We grew this business in 1999 by delivering a net income gain of 30% and total revenue growth of 27%. Total revenue growth for our investment advisory businesses was significant. Corporate and Personal Trust delivered 30% and 14% increases, respectively. Institutional Trust had a banner year with a 22% revenue increase, driven in large part by superior sales in Foundation & Endowment Services, which was up 18%. [PHOTO OF CHRIS GREINER, SR. GREINER BROS. ENGINEERING, INC., INDIANAPOLIS] [TEXT IN PHOTO] Fifth Third Investment Advisors Vice President Steve Wilson manages Greiner Bros.' investments and provides a profit sharing plan that allows them to attract and retain employees. The mechanical engineering firm, led by Chris Sr., Tom and Chris Jr., recently completed work on the Conseco Fieldhouse, home of the Indiana Pacers. 11 INVESTMENT ADVISING SOLUTIONS Retirement Plan Services was up 25%, reflecting the national interest in planning for the future. Our brokerage business at Fifth Third Securities also contributed strongly with 31% revenue growth. Our investment philosophy of "consistent, quality growth" continues to drive the management of the Fifth Third Funds(R), a family of 16 mutual funds, and the portfolios individually managed here at Fifth Third. Several of the Funds received accolades from leading industry mutual fund analysts during 1999 for their outstanding performance. We remain focused on investing in companies that are growing, and that have the potential to do so consistently over time. Earnings growth fuels long-term performance, and we are committed to delivering this performance to our clients. Fifth Third Securities continued to offer investors a wide range of unique investment vehicles. Our Strategic Communications & Technology Unit Trust, launched in late 1998 to invest in 44 name-brand and emerging technology companies including America Online and Lucent Technologies, delivered a 162% appreciation in value. The fund matures in 2003, and others are in the offing for 2000. We also developed an Exchange Fund for individuals with highly appreciated stock. And as part of a strategy of offering very conservative clients an opportunity to receive higher rates of return on their cash investments, we introduced several annuity products, and sales increased by 168%. Fifth Third Securities grew its public finance business in 1999 to become the second largest underwriter and financial advisor in Ohio for infrastructure and development projects. We served as senior co-manager of the State of Ohio's Treasury debt issue and completed an $84 million bond sale for Ohio State University and a $45 million issue for Franklin County, Ohio. Other deals included a $22 million private placement for a Florida health care company, a $7 million offering for the City of Springdale and a $1.7 million deal for Fairfield Township. We are proud to serve as financial adviser to the city of Ashland, Kentucky and, with our recently opened public finance offices in Lexington and Indianapolis, we are well-positioned to continue to capitalize on school financing and geographic expansion opportunities. [NEWSPAPER ARTICLE] [GRAPH] $78 $97 $115 $165 $209 [ ] REVENUE $29 $33 $41 $50 $65 [ ] NET INCOME - ---------------------------------------- 95 96 97 98 99 INVESTMENT ADVISORS ($ IN MILLIONS) The Securities Services Group, which now provides securities processing services to 188 mutual funds and over 700 financial services companies, introduced the Securities Workstation, an Internet-based product to give institutional clients access to custodial account information in a secure environment. The group has $118 billion in total assets under custody. Fifth Third is a full-service money management firm, offering investments, brokerage, trust, and private banking services, including underwriting and public financing services to our clients. As we continue to expand our services throughout the Midwest, we remain focused on building wealth for our customers through consistent quality growth of the portfolios we manage and through the delivery of superior service to all clients. 9 12 MIDWEST PAYMENT SYSTEMS: - -------------------------------------------------------------------------------- WORKING HARD TO DEVELOP DATA PROCESSING SOLUTIONS Whenever you use a credit or debit card to purchase a suit at Saks, a book at Barnes & Noble, or a pair of wingtips from Shoe Carnival, Fifth Third is there. When you stop at an ATM in England, Japan or anywhere in the U.S. Midwest, Fifth Third is there, too, providing data processing solutions to over 60,000 retail locations and financial institutions around the world. Fifth Third, a leader in e-commerce, processed 3.7 billion transactions in 18 different currencies last year through our data processing subsidiary, Midwest Payment Systems (MPS). MPS posted a 28% increase in revenue growth and a 35% increase in net income by providing Electronic Fund Transfer [PHOTO OF SCOTT A. HONNOLD, VICE PRESIDENT & TREASURER, SAKS INCORPORATED] [SAKS FIFTH AVENUE LOGO] [TEXT IN PHOTO] SAKS took advantage of MPS' credit card processing and Internet-based imaging technology for their network at over 350 retail stores, including Saks Fifth Avenue, Proffitt's, Carson Pirie Scott, Parisian, McRae's, Yonkers and Herberger's. MPS Executive Vice President Barry Boerstler, center, and Vice President Joe Pappano review plans with Scott, who offers, "MPS' Mvision(TM) imaging technology enhances our overall payment system and improves our bottom line by giving us instant access to all of our credit card transaction information." 13 (EFT), Merchant Processing and Electronic Benefits Transfer (EBT) service solutions. MPS now delivers EFT services, including ATM processing, electronic personal banking services, and Visa(R) check card and MasterMoney(TM) debit card programs to 769 financial institutions. The group added 134 new financial institutions last year, and for the second year running, MPS was named the #1 EFT processor by Faulkner & Gray for its combined EFT and credit card volume of 306 million transactions during the month of March. Jeanie(R), Fifth Third's proprietary ATM network, was welcomed at 51 new institutions and merchants during the year. The network is now available in 20 states, plus Washington D.C., and serves 6.5 million cardholders. Anticipating more than 40 million Visa check card and MasterCard(R) debit card transactions next year, Houston-based Pulse Network sought a processing partner to handle its off-line debit business. Pulse President and Chief Executive Officer Stan Paur offers, "With the exploding deployment of signature-based debit cards, Pulse needed a very efficient, state-of-the-art service provider. We chose MPS because it offered the most technologically sound solution with unprecedented flexibility. And with online back-office support capabilities, an automated fraud prevention system and Internet-accessible reports and transaction information, MPS was the stand-out choice for processing services." The MPS Merchant Processing Group added 3,035 new credit, debit and EBT service retailers, including Saks, Barnes & Noble, Belk, Best Buy Direct and Giant Eagle. Now processing for over 62,800 retail locations, MPS ranks sixth nationally in merchant processing and has demonstrated the fastest growth among the top 10 processors. [NEWSPAPER ARTICLE] [GRAPH] $80 $94 $119 $151 $194 [ ] REVENUE $24 $25 $33 $46 $62 [ ] NET INCOME - ------------------------------------- 95 96 97 98 99 MPS ($ IN MILLIONS) For the fourth consecutive year, Visa recognized MPS as having one of the best chargeback and copy request fulfillment rates in the business. Fifth Third's investment in technology continues to play a pivotal role in the MPS success story. MPS' capabilities as a transaction processor are perfect for business-to-business e-commerce. MPS now offers a suite of website services for any type and size of business, including shopping cart capabilities, real time order placement, card authorization and settlement, and online bill presentment and payment services. In fact, PC Week magazine recently ranked MPS #1 among their "Financial Fast Track 100" for our innovative e-commerce capabilities. MPS strives to develop and deliver the most flexible and technologically advanced products available. We combine service with innovation and, as always, we are working hard to develop data processing solutions. 11 14 FIFTH THIRD CARES: - ------------------ WORKING HARD IN OUR COMMUNITIES Building a stronger community helps build a stronger bank. That's why Fifth Third introduced its innovative Building, Lending, Investments and Technology Zones, or BLITZ initiative, in 1999. BLITZ pledged $9 billion in development funds over the next three years to the communities where our customers and employees live and work. BLITZ gives low- and moderate-income consumers and targeted businesses greater access to a broad spectrum of financial products and services. For example, it offers reduced rates on building projects, and reduced percentage points and closing costs on our Fifth Third Good Neighbor(R) mortgage products. BLITZ includes investments in low-income tax credit and venture capital projects. Another feature is free computers with Internet access for community centers, like the one featured on this page. [PHOTO WITH LANGUAGE BELOW] [Santa Maria Community Services' Social Director Stephanie Larkins works with area children on a Fifth Third Building, Lending, Investments and Technology Zones, or "BLITZ" computer.] [GRAPH - UNITED WAY GIVING] ($ in millions) $2.1 $2.4 $2.7 $3.3 $4.1 95 96 97 98 99 Includes employee and corporate contributions. BLITZ offers financing options to not-for-profit agencies and information, products and services to consumers who wish to purchase a home. With BLITZ, Fifth Third can fund initiatives to promote wellness, community and self-reliance through investments in projects that have the potential to bring prosperity to area residents. The announcement of BLITZ is further evidence of our commitment to give something back to communities in each of our markets. In 1999, we contributed $2.5 million through our Fifth Third Foundation, and $11 million through the charitable trusts for which we proudly serve as trustee. In addition, corporate and employee United Way contributions for 1999 totaled $4.1 million. In 1948, Fifth Third became one of the first institutions to establish a permanently endowed foundation. Since its creation, the Fifth Third Foundation has provided over $17 million to worthwhile projects and organizations. Today, the Foundation has grown to $43 million in assets, thanks to the sound management of Fifth Third Bank's investment professionals. 15 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31 ($ in millions, except per share data) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans and Leases......................................... $1,912 1,856 1,761 - --------------------------------------------------------------------------------------------------------------------------- Interest on Securities Taxable.................................................................... 776 687 669 Exempt from Income Taxes................................................... 38 32 28 - --------------------------------------------------------------------------------------------------------------------------- Total Interest on Securities.................................................. 814 719 697 - --------------------------------------------------------------------------------------------------------------------------- Interest on Other Short-Term Investments...................................... 12 10 19 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Income......................................................... 2,738 2,585 2,477 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits Interest Checking ......................................................... 79 73 69 Savings ................................................................... 116 128 96 Money Market .............................................................. 75 74 105 Other Time ................................................................ 440 515 554 Certificates-$100,000 and Over ............................................ 104 105 91 Foreign Office ............................................................ 45 13 22 - --------------------------------------------------------------------------------------------------------------------------- Total Interest on Deposits ................................................... 859 908 937 Interest on Federal Funds Borrowed ........................................... 172 122 86 Interest on Short-Term Bank Notes............................................. 33 26 37 Interest on Other Short-Term Borrowings....................................... 133 120 115 Interest on Long-Term Debt and Notes ......................................... 136 140 129 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Expense ....................................................... 1,333 1,316 1,304 - --------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME .......................................................... 1,405 1,269 1,173 Provision for Credit Losses .................................................. 134 123 117 - --------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES ........................ 1,271 1,146 1,056 - --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATING INCOME Investment Advisory Income ................................................... 184 151 112 Service Charges on Deposits .................................................. 174 156 132 Data Processing Income ....................................................... 180 141 113 Other Service Charges and Fees ............................................... 338 294 225 Securities Gains ............................................................. 1 12 8 - --------------------------------------------------------------------------------------------------------------------------- Total Other Operating Income ................................................. 877 754 590 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Salaries, Wages and Incentives ............................................... 425 382 335 Employee Benefits ............................................................ 80 72 67 Equipment Expenses ........................................................... 49 45 40 Net Occupancy Expenses ....................................................... 73 67 63 Other Operating Expenses ..................................................... 413 379 344 Merger-Related Charges ....................................................... 82 121 -- - --------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses ..................................................... 1,122 1,066 849 - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES ................................................... 1,026 834 797 Applicable Income Taxes ...................................................... 358 287 268 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME ................................................................... $ 668 547 529 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE ........................................................... $ 2.18 1.81 1.78 DILUTED EARNINGS PER SHARE ................................................... $ 2.15 1.78 1.75 - --------------------------------------------------------------------------------------------------------------------------- CASH DIVIDENDS DECLARED PER SHARE ............................................ $ .88 .71 .57 - --------------------------------------------------------------------------------------------------------------------------- See Notes to Consolidated Financial Statements.
13 16 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------------------- December 31 ($ in millions) 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- ASSETS - --------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks ........................................................ $ 1,213 1,045 Securities Available for Sale (amortized cost 1999-$13,038 and 1998-$11,037) ... 12,688 11,184 Securities Held to Maturity (fair value 1999-$129 and 1998-$122) ............... 129 122 Other Short-Term Investments ................................................... 355 165 Loans Held for Sale ............................................................ 297 588 Loans and Leases Commercial Loans ............................................................ 6,207 5,559 Construction Loans .......................................................... 1,068 826 Commercial Mortgage Loans ................................................... 2,651 2,193 Commercial Lease Financing .................................................. 2,283 1,812 Residential Mortgage Loans .................................................. 4,814 5,691 Consumer Loans .............................................................. 5,284 4,458 Consumer Lease Financing .................................................... 3,580 2,531 Unearned Income ............................................................. ( 923) ( 713) Reserve for Credit Losses ................................................... ( 367) ( 332) - --------------------------------------------------------------------------------------------------------------------------- Total Loans and Leases ......................................................... 24,597 22,025 Bank Premises and Equipment .................................................... 482 449 Accrued Income Receivable ...................................................... 321 343 Other Assets ................................................................... 1,507 1,171 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS ................................................................... $41,589 37,092 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES - --------------------------------------------------------------------------------------------------------------------------- Deposits Demand ...................................................................... $ 3,834 3,873 Interest Checking ........................................................... 4,177 3,808 Savings ..................................................................... 4,167 4,090 Money Market ................................................................ 1,617 1,840 Other Time .................................................................. 8,846 8,794 Certificates-$100,000 and Over .............................................. 1,292 1,737 Foreign Office .............................................................. 2,150 354 - --------------------------------------------------------------------------------------------------------------------------- Total Deposits ................................................................. 26,083 24,496 Federal Funds Borrowed ......................................................... 2,971 2,138 Short-Term Bank Notes .......................................................... 1,317 -- Other Short-Term Borrowings .................................................... 4,085 2,377 Accrued Taxes, Interest and Expenses ........................................... 786 754 Other Liabilities .............................................................. 293 296 Long-Term Debt ................................................................. 1,804 3,063 Guaranteed Preferred Beneficial Interests in Convertible Subordinated Debentures 173 173 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES .............................................................. 37,512 33,297 - --------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (a) - --------------------------------------------------------------------------------------------------------------------------- Common Stock (b) ............................................................... 686 671 Capital Surplus ................................................................ 916 884 Retained Earnings .............................................................. 2,704 2,204 Accumulated Nonowner Changes in Equity ......................................... ( 225) 94 Treasury Stock ................................................................. -- ( 58) Other .......................................................................... ( 4) -- - --------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY ..................................................... 4,077 3,795 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................................... $41,589 37,092 - ---------------------------------------------------------------------------------------------------------------------------
(a) 500,000 shares of no par value preferred stock are authorized of which none have been issued. (b) Stated value $2.22 per share; authorized 500,000,000; outstanding 1999 -- 308,886,592 and 1998 -- 302,064,369 (excludes 922,028 treasury shares). See Notes to Consolidated Financial Statements. 14 17 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ACCUMULATED NONOWNER COMMON CAPITAL RETAINED CHANGES TREASURY ($ IN MILLIONS) STOCK SURPLUS EARNINGS IN EQUITY STOCK OTHER TOTAL - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 ................ $673 826 1,626 10 -- -- 3,135 Net Income and Nonowner Changes in Equity, Net of Tax: Net Income .................................. 529 529 Change in Unrealized Gains on Securities Available for Sale ....................... 95 95 - --------------------------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 624 Cash Dividends Declared Fifth Third Bancorp at $.56 8/9 ............ ( 137) ( 137) Pooled Companies Prior to Acquisition .... ( 34) ( 34) Shares Acquired for Treasury ................ ( 17) ( 259) ( 276) Stock Options Exercised, Including Treasury Shares Issued ......... 2 ( 11) 35 26 Corporate Tax Benefit Related to Exercise of Non-Qualified Stock Options ........... 2 2 Pooled Operations for the Year Ended December 31, 1997 ........................ 10 ( 40) ( 30) Stock Issued in Acquisitions and Other ... 3 5 40 48 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 ................ 661 832 1,944 105 ( 184) -- 3,358 Net Income and Nonowner Changes in Equity, Net of Tax: Net Income .................................. 547 547 Change in Unrealized Losses on Securities Available for Sale ....................... ( 11) ( 11) - --------------------------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 536 Cash Dividends Declared Fifth Third Bancorp at $.71 per share .... ( 187) ( 187) Pooled Companies Prior to Acquisition .... ( 32) ( 32) Shares Acquired for Treasury ................ ( 5) ( 138) ( 143) Earnings Adjustment of Pooled Entity (a) ( 8) ( 8) Stock Options Exercised, Including Treasury Shares Issued ......... 3 ( 40) 59 22 Corporate Tax Benefit Related to Exercise of Non-Qualified Stock Options ........... 4 4 Pooled Operations for the Year Ended December 31, 1998 ........................ 34 ( 60) ( 26) Stock Issued in Public Offering ............. 8 48 122 178 Stock Issued in Acquisitions and Other ...... 4 6 83 93 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 ................ 671 884 2,204 94 ( 58) -- 3,795 Net Income and Nonowner Changes in Equity, Net of Tax: Net Income 668 668 Change in Unrealized Losses on Securities ... Available for Sale ....................... ( 319) ( 319) - --------------------------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 349 Cash Dividends Declared Fifth Third Bancorp at $.88 per share .... ( 248) ( 248) Pooled Companies Prior to Acquisition .... ( 37) ( 37) Stock Options Exercised, Including Treasury Shares Issued ......... 3 ( 23) 58 38 Corporate Tax Benefit Related to Exercise of Non-Qualified Stock Options ........... 15 15 Pooled Operations For the Year Ended December 31, 1999 ........................ ( 66) ( 66) Stock Issued in Acquisitions and Other ...... 12 106 117 ( 4) 231 - --------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999 ................ $686 916 2,704 ( 225) -- ( 4) 4,077 - ---------------------------------------------------------------------------------------------------------------------------
(a) The restatement of the CitFed Bancorp, Inc. (CitFed) merger was accomplished by combining CitFed's March 31, 1998 fiscal year financial information with the Bancorp's December 31, 1997 calendar year financial information. In 1998, CitFed's fiscal year was conformed to the Bancorp's calendar year. As a result of conforming fiscal periods, the Bancorp's Consolidated Statements of Income for the fourth quarter of 1997 and the first quarter of 1998 include CitFed's net income for the three months ended March 31, 1998 of $7.8 million. An adjustment to shareholders' equity removes the effect of including CitFed's financial results in both periods. See Notes to Consolidated Financial Statements. 15 18 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31 ($ in millions) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income .................................................................... $ 668 547 529 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses ............................................. 134 123 117 Depreciation, Amortization and Accretion ............................... 104 118 94 Provision for Deferred Income Taxes ..................................... 255 81 87 Realized Securities Gains................................................ ( 12) ( 16) ( 17) Realized Securities Losses .............................................. 11 4 9 Proceeds from Sales of Residential Mortgage Loans Held for Sale ......... 2,709 4,009 1,582 Net Gains on Sales of Loans ............................................. ( 36) ( 46) ( 20) Increase in Residential Mortgage Loans Held for Sale .................... (2,381) (4,171) (1,786) Decrease (Increase) in Accrued Income Receivable ........................ 25 ( 72) ( 3) Decrease (Increase) in Other Assets ..................................... ( 229) ( 210) 37 Increase (Decrease) in Accrued Taxes, Interest and Expenses ............. ( 227) 144 15 Increase in Other Liabilities ........................................... 17 14 43 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ..................................... 1,038 525 687 - --------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale .......................... 3,934 3,098 3,042 Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale ................................................................... 3,244 3,724 1,727 Purchases of Securities Available for Sale .................................... (6,891) (6,454) (4,042) Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity ... 48 78 282 Purchases of Securities Held to Maturity ...................................... ( 55) ( 53) ( 125) Decrease (Increase) in Other Short-Term Investments ........................... ( 163) ( 75) 141 Purchases of Loans in Acquisitions ............................................ -- ( 41) -- Increase in Loans and Leases .................................................. (4,615) (1,519) (2,743) Purchases of Bank Premises and Equipment ...................................... ( 116) ( 82) ( 79) Proceeds from Disposal of Bank Premises and Equipment ......................... 35 9 7 Net Cash Received (Paid) in Acquisitions ...................................... 47 24 ( 15) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES ......................................... (4,532) (1,291) (1,805) - --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Purchases of Deposits.......................................................... 120 117 129 Increase (Decrease) in Core Deposits .......................................... ( 86) 61 ( 73) Increase (Decrease) in CDs-- $100,000 and Over, including Foreign Office ...... 1,328 ( 179) 800 Increase (Decrease) in Federal Funds Borrowed ................................. 833 802 ( 192) Increase (Decrease) in Short-Term Bank Notes .................................. 1,317 ( 555) ( 301) Increase (Decrease) in Other Short-Term Borrowings ............................ 1,706 ( 137) 570 Proceeds from Issuance of Long-Term Debt ...................................... 1,570 2,676 3,409 Proceeds Pertaining to Guaranteed Preferred Beneficial Interests in Convertible Subordinated Debentures ........................................ -- 173 -- Repayment of Long-Term Debt ................................................... (2,830) (1,916) (2,893) Payment of Cash Dividends ..................................................... ( 269) ( 168) ( 134) Exercise of Stock Options ..................................................... 53 27 28 Proceeds from Sale of Common Stock ............................................ -- 178 -- Purchases of Treasury Stock ................................................... -- ( 199) ( 317) Other ......................................................................... ( 80) ( 33) ( 30) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES ..................................... 3,662 847 996 - --------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS ................................ 168 81 ( 122) CASH AND DUE FROM BANKS AT BEGINNING OF YEAR .................................. 1,045 964 1,086 - --------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR ........................................ $1,213 1,045 964 - ---------------------------------------------------------------------------------------------------------------------------
Note: The Bancorp paid Federal income taxes of $141 million, $174 million and $155 million in 1999, 1998 and 1997, respectively. The Bancorp paid interest of $1,302 million, $1,319 million and $1,309 million in 1999, 1998 and 1997, respectively. The Bancorp had noncash investing activities consisting of the securitization and transfer to securities of $2.1 billion, $1.6 billion and $1.1 billion of residential mortgage loans in 1999, 1998 and 1997, respectively. See Notes to Consolidated Financial Statements. 16 19 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES NATURE OF OPERATIONS Fifth Third Bancorp (Bancorp) conducts its principal activities through its banking and non-banking subsidiaries from 648 offices located throughout Ohio, Indiana, Kentucky, Michigan, Illinois, Arizona and Florida. Principal activities include commercial and retail banking, investment advisory services and data processing. BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of the Bancorp and its subsidiaries. All material intercompany transactions and balances have been eliminated. Certain prior period data has been reclassified to conform to current period presentation. Financial data for all prior periods has been restated to reflect the 1999 mergers with CNB Bancshares, Inc. (CNB) and Peoples Bank Corporation of Indianapolis (Peoples). These mergers were accounted for as poolings-of-interests. Cash dividends per common share are those the Bancorp declared prior to the mergers with CNB and Peoples. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. SECURITIES Securities are classified as held to maturity, available for sale or trading on the date of purchase. Only those securities classified as held to maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available for sale and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes and are included in accumulated nonowner changes in equity or income, respectively. Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. LOANS AND LEASES Interest income on loans is based on the principal balance outstanding, with the exception of interest on discount basis loans, computed using a method which approximates the interest income. The accrual of interest income for commercial, construction and mortgage loans is discontinued when there is a clear indication the borrower's cash flow may not be sufficient to meet payments as they become due. Such loans are also placed on nonaccrual status when the principal or interest is past due ninety days or more, unless the loan is well secured and in the process of collection. When a loan is placed on nonaccrual status, all previously accrued and unpaid interest is charged against income. Loan and lease origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans or commitments as a yield adjustment. Interest income on direct financing leases is recognized to achieve a constant periodic rate of return on the outstanding investment. Interest income on leveraged leases is recognized to achieve a constant rate of return on the outstanding investment in the lease, net of the related deferred income tax liability, in the years in which the net investment is positive. Residential mortgage loans held for sale are valued at the lower of aggregate cost or fair value. The Bancorp generally has commitments to sell residential mortgage loans held for sale in the secondary market. Gains or losses on sales are recognized in Other Service Charges and Fees upon delivery. Statement of Financial Accounting Standards (SFAS)No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was adopted in 1997 and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The adoption of SFAS No. 125 did not have a material effect on the Consolidated Financial Statements of the Bancorp. When the Bancorp sells or securitizes mortgage loans with servicing rights retained, the total cost of the mortgage loan is allocated to the servicing rights and the loans based on their relative fair values. The resulting servicing rights are amortized in proportion to, and over the period of estimated net servicing revenues. Servicing rights are assessed for impairment periodically, based on fair value, with any impairment recognized through a valuation allowance. For purposes of measuring impairment, the rights are stratified based on interest rate and original maturity. Fees received for servicing mortgage loans owned by investors are based on a percentage of the outstanding monthly principal balance of such loans and are included in income as loan payments are received. Costs of servicing loans are charged to expense as incurred. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the underlying collateral. The Bancorp evaluates the collectibility of both the interest and principal when assessing the need for a loss accrual. RESERVE FOR CREDIT LOSSES The Bancorp maintains a reserve to absorb probable loan and lease losses inherent in the portfolio. Credit losses are charged and recoveries are credited to the reserve. Provisions for credit losses are credited to the reserve in an amount that management considers necessary to maintain an appropriate level of reserves given the estimated losses in the portfolio. The reserve is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. In determining the appropriate level of reserves, the Bancorp estimates losses using a range derived from "base" and "conservative" estimates. The Bancorp's methodology for assessing the appropriate reserve level consists of several key elements. Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Bancorp. Included in the review of individual loans are those that are impaired as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Any reserves for impaired loans are measured based on the present value of expected future cash flows discounted at the loans' effective interest rate or fair value of the underlying collateral. The Bancorp evaluates the collectibility of both principal and interest when assessing the need for loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations. The loss rates are derived from a migration analysis, which computes the net charge-offs experience sustained on loans according to their internal risk grade. These grades encompass nine categories that define a borrower's ability to repay their loan obligations. Homogenous loans, such as consumer installment, residential mortgage loans, and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on the expected net charge-offs for one year. Loss rates are based on the average net charge-off history by loan category. 17 20 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans. Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management's judgement, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Bancorp's internal credit examiners. Reserves on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. BANK PREMISES AND EQUIPMENT Bank premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method based on estimated useful lives of the assets for book purposes, while accelerated depreciation is used for income tax purposes. Amortization of leasehold improvements is computed using the straight-line method over the lives of the related leases or useful lives of the related assets, whichever is shorter. Maintenance, repairs and minor improvements are charged to operating expenses as incurred. INTANGIBLE ASSETS Goodwill and other intangibles are amortized on a straight-line basis, generally over a period of up to 25 years. Intangible assets, net of accumulated amortization, included in Other Assets in the Consolidated Balance Sheets at December 31, 1999 and 1998 were $544.6 million and $415.2 million, respectively. Management reviews intangible assets for possible impairment if there is a significant event that detrimentally affects operations. Impairment is measured using estimates of the discounted future earnings potential of the entity or assets acquired. DERIVATIVE FINANCIAL INSTRUMENTS The Bancorp enters into foreign exchange forward contracts primarily to enable customers involved in international trade to hedge their exposure to foreign currency fluctuations. The Bancorp generally hedges its exposure to market rate fluctuations by entering into offsetting third-party forward contracts, which are predominantly settled daily. Unrealized gains and losses on forward contracts are insignificant and are recognized in Other Service Charges and Fees in the Consolidated Statements of Income when realized. The Bancorp has purchased options and interest rate floors to hedge a portion of the value of mortgage servicing rights against changes in prepayment rates. Premiums are amortized over the option life on a straight-line basis. The contracts are designated as hedges, with gains and losses recorded as basis adjustments to the mortgage servicing rights. The Bancorp has interest rate caps, floors and swaps to adjust the interest rate sensitivity of long-term, fixed-rate capital-qualifying securities and hedge the risk of future fluctuations in interest rates relating to hedging transactions effected for commercial clients. The unamortized cost of acquiring interest rate caps and floors is included in Other Assets in the Consolidated Balance Sheets and amortized over the term of the agreements as interest expense. Interest rate swaps are linked through designation with certain assets or liabilities of the Bancorp. Net interest income (expense) resulting from the differential between exchanging floating and fixed-rate interest payments is recorded on an accrual basis as an adjustment to the interest income (expense) of the associated asset or liability. The Bancorp does not hold or issue derivative financial instruments for trading purposes. EARNINGS PER SHARE Earnings per share is calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The assumed conversion of convertible subordinated debentures and the exercise of stock options is included in the calculation of diluted earnings per share. SFAS No. 128, "Earnings Per Share," was adopted in 1997 with all prior-period earnings per share data restated. SFAS No. 128 requires dual presentation of earnings per share and diluted earnings per share on the Consolidated Statements of Income and other computational changes. The adoption of SFAS No. 128 did not have a material effect on previously reported earnings per share. OTHER SFAS No. 130, "Reporting Comprehensive Income," was adopted in 1998. The statement requires additional reporting of items that effect comprehensive income but not net income. Examples relevant to the Bancorp include unrealized gains and losses on securities available for sale. The Bancorp elected to present the required disclosures in the Consolidated Statements of Shareholders' Equity. The caption "Net Income and Nonowner Changes in Equity, Net of Tax," represents total comprehensive income as defined in SFAS No. 130. Because the statement solely relates to disclosure requirements, it had no effect on the Bancorp's financial results. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was adopted in 1998. The statement requires financial disclosure and descriptive information about reportable operating segments of an enterprise. This statement resulted in additional financial statement disclosures upon adoption, however, the Bancorp did not make material changes to its segment groupings. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," amended Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000. Although the Bancorp has not formally completed its evaluation of SFAS No. 133, as amended, the adoption of the statement is not expected to have a material effect on the Bancorp's Consolidated Financial Statements. Securities and other property held by Fifth Third Investment Advisors, a division of the Bancorp's banking subsidiaries, in a fiduciary or agency capacity are not included in the Consolidated Balance Sheets because such items are not assets of the subsidiaries. Investment advisory income in the Consolidated Statements of Income is recognized on the accrual basis. Treasury stock is carried at cost. 18 21 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 2-SECURITIES Securities available for sale as of December 31: - -------------------------------------------------------------------------------- 1999 -------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR ($ in millions) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------- U.S. Government and agencies obligations....... $ 654.0 0.4 ( 13.9) 640.5 Obligations of states and political subdivisions...... 716.8 5.5 ( 22.7) 699.6 Agency mortgage- backed securities........ 10,087.4 11.2 (311.8) 9,786.8 Other bonds, notes and debentures........ 1,378.7 .4 ( 22.3) 1,356.8 Other securities.... 200.9 13.0 ( 10.1) 203.8 - -------------------------------------------------------------------------------- Total securities.... $13,037.8 30.5 (380.8) 12,687.5 - -------------------------------------------------------------------------------- 1998 -------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR ($ in millions) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------- U.S. Government and agencies obligations....... $ 303.8 6.7 -- 310.5 Obligations of states and political subdivisions...... 681.7 24.1 ( 1.9) 703.9 Agency mortgage- backed securities........ 8,878.6 134.7 (11.3) 9,002.0 Other bonds, notes and debentures........ 808.2 5.4 (25.1) 788.5 Other securities.... 364.9 15.4 ( 1.3) 379.0 - -------------------------------------------------------------------------------- Total securities.... $11,037.2 186.3 (39.6) 11,183.9 - -------------------------------------------------------------------------------- Securities held to maturity as of December 31: - -------------------------------------------------------------------------------- 1999 -------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR ($ in millions) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------- Obligations of states and political subdivisions...... $ 117.1 -- -- 117.1 Other bonds, notes and debentures........ 1.5 -- -- 1.5 Other securities.... 10.5 -- -- 10.5 - -------------------------------------------------------------------------------- Total securities.... $129.1 -- -- 129.1 - -------------------------------------------------------------------------------- 1998 -------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR ($ in millions) COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------- Obligations of states and political subdivisions...... $ 86.0 -- -- 86.0 Other bonds, notes and debentures........ 1.7 -- -- 1.7 Other securities.... 34.2 -- -- 34.2 - -------------------------------------------------------------------------------- Total securities.... $121.9 -- -- 121.9 - -------------------------------------------------------------------------------- The amortized cost and approximate fair value of securities at December 31, 1999, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties. - -------------------------------------------------------------------------------- AVAILABLE FOR SALE HELD TO MATURITY ------------------ ---------------- AMORTIZED FAIR AMORTIZED FAIR ($ in millions) COST VALUE COST VALUE - -------------------------------------------------------------------------------- Debt securities: Under 1 year... $ 132.4 132.0 $ 50.9 50.9 1-5 years...... 928.4 914.6 19.9 19.9 6-10 years..... 1,051.2 1,040.3 4.1 4.1 Over 10 years.. 637.5 610.0 43.7 43.7 Agency mortgage- backed securities..... 10,087.4 9,786.8 -- -- Other securities 200.9 203.8 10.5 10.5 - -------------------------------------------------------------------------------- Total securities $13,037.8 12,687.5 $129.1 129.1 - -------------------------------------------------------------------------------- At December 31, 1999 and 1998, securities with a book value of $7.7 billion and $7.1 billion, respectively, were pledged to secure short-term borrowings, public deposits, trust funds and for other purposes as required or permitted by law. NOTE 3-RESERVE FOR CREDIT LOSSES Transactions in the reserve for credit losses for the years ended December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Balance at January 1........ $ 331.6 312.2 284.3 Losses charged off.......... ( 154.3) ( 142.8) ( 121.7) Recoveries of losses previously charged off.... 42.5 33.0 30.5 - -------------------------------------------------------------------------------- Net charge-offs............. ( 111.8) ( 109.8) ( 91.2) Provision charged to operations................ 134.0 123.5 116.9 Reserve of acquired institutions and other.... 12.8 5.7 2.2 - -------------------------------------------------------------------------------- Balance at December 31...... $ 366.6 331.6 312.2 - -------------------------------------------------------------------------------- Impaired loan information, under SFAS No. 114, at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Impaired loans with a valuation reserve........ $ 22.9 41.1 Impaired loans with no valuation reserve..... 24.7 29.7 - -------------------------------------------------------------------------------- Total impaired loans........ $ 47.6 70.8 Valuation reserve on impaired loans............ $ 9.4 10.9 - -------------------------------------------------------------------------------- Average impaired loans, net of valuation reserves, were $49.1 million in 1999, $63.8 million in 1998 and $56.1 million in 1997. Cash basis interest income recognized on those loans during each of the years was immaterial. 19 22 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 4-LEASE FINANCING A summary of the gross investment in lease financing at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Direct financing leases.......... $5,184.5 3,875.7 Leveraged leases................. 678.0 467.3 - -------------------------------------------------------------------------------- Total lease financing............ $5,862.5 4,343.0 - -------------------------------------------------------------------------------- The components of the investment in lease financing at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Rentals receivable, net of principal and interest on nonrecourse debt........... $3,453.3 2,645.8 Estimated residual value of leased assets.............. 2,409.2 1,697.2 - -------------------------------------------------------------------------------- Gross investment in lease financing..................... 5,862.5 4,343.0 Unearned income.................. ( 875.7) ( 664.4) - -------------------------------------------------------------------------------- Total net investment in lease financing...................... $4,986.8 3,678.6 - -------------------------------------------------------------------------------- At December 31, 1999, the minimum future lease payments receivable for each of the years 2000 through 2004 were $1,162.2 million, $1,135.3 million, $1,082.3 million, $862.4 million and $552.1 million, respectively. NOTE 5-BANK PREMISES AND EQUIPMENT A summary of bank premises and equipment at December 31: - -------------------------------------------------------------------------------- Estimated ($ in millions) Useful Life 1999 1998 - -------------------------------------------------------------------------------- Land and improvements..... $118.5 82.6 Buildings................. 18 to 50 yrs. 343.3 324.8 Equipment................. 3 to 20 yrs. 313.4 310.0 Leasehold improvements.... 6 to 25 yrs. 79.0 80.4 Accumulated depreciation and amortization........ ( 372.7) ( 349.0) - -------------------------------------------------------------------------------- Total bank premises and equipment............... $481.5 448.8 - -------------------------------------------------------------------------------- Depreciation and amortization expense related to bank premises and equipment was $52.9 million in 1999, $46.5 million in 1998 and $42.8 million in 1997. Occupancy expense has been reduced by rental income from leased premises of $10.6 million in 1999 and $9.7 million in 1998 and 1997. The Bancorp's subsidiaries have entered into a number of noncancelable lease agreements with respect to bank premises and equipment. Equipment under noncancelable lease agreements was not material to the Bancorp. A summary of the minimum annual rental commitments under noncancelable lease agreements for land and buildings at December 31, 1999, exclusive of income taxes and other charges payable by the lessee: - -------------------------------------------------------------------------------- LAND AND ($ in millions) BUILDINGS - -------------------------------------------------------------------------------- 2000........................... $ 22.2 2001........................... 20.6 2002........................... 18.0 2003........................... 16.2 2004........................... 18.4 2005 and subsequent years...... 52.5 - -------------------------------------------------------------------------------- Total.......................... $147.9 - -------------------------------------------------------------------------------- Rental expense for cancelable and noncancelable leases was $30.1 million for 1999, $24.9 million for 1998 and $24.1 million for 1997. NOTE 6-SHORT-TERM BORROWINGS A summary of short-term borrowings and rates at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Federal funds borrowed: Balance................... $2,971.9 2,137.9 1,358.1 Rate...................... 5.71% 4.65% 5.66% - -------------------------------------------------------------------------------- Short-term bank notes: Balance................... $1,317.4 -- 555.0 Rate...................... 5.98% -- 5.85% - -------------------------------------------------------------------------------- Securities sold under Agreements to repurchase: Balance................... $3,761.4 2,275.3 1,825.8 Rate...................... 5.08% 4.63% 4.96% - -------------------------------------------------------------------------------- Other: Balance................... $323.0 101.4 652.4 Rate...................... 5.46% 4.27% 5.75% - -------------------------------------------------------------------------------- Total short-term borrowings: Balance................... $8,373.7 4,514.6 4,391.3 Rate...................... 5.45% 4.63% 5.41% - -------------------------------------------------------------------------------- Average outstanding......... $6,964.6 5,105.5 4,481.6 Maximum month-end balance................... $8,786.9 6,073.1 5,227.8 Weighted average interest rate............. 4.85% 5.26% 5.31% - -------------------------------------------------------------------------------- Short-term senior notes are offered with maturities ranging from 30 days to one year, are obligations of seven of the Bancorp's subsidiary banks and are included in the above table as short-term bank notes. In addition, medium-term senior notes and subordinated bank notes with maturities ranging from five years to 30 years can be issued by the seven subsidiary banks, none of which were outstanding as of December 31, 1999 or 1998. At December 31, 1999, the Bancorp had issued $18.3 million in commercial paper, with unused lines of credit of $40 million available to support commercial paper transactions and other corporate requirements. NOTE 7-LONG-TERM BORROWINGS A summary of long-term borrowings at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Bancorp: Capital Securities, 8.136%, due 2027............... $ 200.0 200.0 Subsidiaries: Subordinated notes, 6.75%, due 2005................ 248.1 247.8 Federal Home Loan Bank advances.. 1,163.8 1,560.6 Securities sold under agreements to repurchase.................. 129.5 1,050.0 Other............................ 62.4 5.2 - -------------------------------------------------------------------------------- Total long-term borrowings....... $1,803.8 3,063.6 - -------------------------------------------------------------------------------- In March 1997, Fifth Third Capital Trust 1 (FTCT1), a wholly-owned subsidiary of the Bancorp, issued $200 million 8.136% Capital Securities due in 2027. The Bancorp has fully and unconditionally guaranteed all of FTCT1's obligations under the Capital Securities. The Capital Securities qualify as Tier 1 capital for regulatory capital purposes. The 6.75% Subordinated Notes due in 2005 are unsecured obligations of a subsidiary bank. Interest is payable semiannually and the notes qualify as total capital for regulatory capital purposes. At December 31, 1999, Federal Home Loan Bank advances have rates ranging from 3.22% to 8.34%, with interest payable 20 23 monthly. The advances were secured by certain mortgage loans and securities. The advances mature as follows: $423.1 million in 2000, $12.7 million in 2001, $137.8 million in 2002, $140.9 million in 2003, $55.1 million in 2004 and $394.2 million thereafter. At December 31, 1999, securities sold under agreements to repurchase have rates ranging from 3.46% to 7.51%, with interest payable monthly. The repurchase agreements mature as follows: $4.7 million in 2000, $4.9 million in 2001, $105.1 million in 2002, $2.6 million in 2003, $1.3 million in 2004 and $10.9 million thereafter. NOTE 8-GUARANTEED PREFERRED BENEFICIAL INTERESTS IN CONVERTIBLE SUBORDINATED DEBENTURES In connection with the merger of CNB, the Bancorp assumed $172.5 million of trust preferred securities through CNB Capital Trust I, a Delaware statutory business trust. The trust preferred securities have a liquidation amount of $25 per share with a cumulative annual distribution rate of 6.0%, or $.375 per share, payable quarterly, and maturing on June 30, 2028. The trust preferred securities are convertible at any time at the conversion ratio of .4267 shares of common stock of the Bancorp for each trust preferred security (equivalent to a conversion price of $58.59), subject to certain adjustments. The sole assets of CNB Capital Trust I are $177.8 million of convertible subordinated debentures of the Bancorp with the interest rate, maturity date and conversion rate substantially identical to those of the trust preferred securities. The back-up obligations of the Bancorp with respect to the trust preferred securities constitute, in the aggregate, a full and unconditional guarantee by the Bancorp of the obligations of CNBCapital Trust I under the trust preferred securities. The Bancorp may redeem the convertible subordinated debentures and thereby cause a redemption of the trust preferred securities in whole (or in part from time to time) on or after June 23, 2001, or in whole (but not in part) within 90 days following the occurrence and continuance of certain adverse federal income tax or capital treatment events. Costs associated with the issuance of the trust preferred securities totaling $4.8 million were capitalized and are being amortized through the maturity date of the securities. The unamortized balance is included in Other Assets in the Consolidated Balance Sheets. The Bancorp records distributions payable on the trust preferred securities as Other Operating Expenses in its Consolidated Statements of Income. NOTE 9-INCOME TAXES The Bancorp and its subsidiaries file a consolidated Federal income tax return. A summary of applicable income taxes included in the Consolidated Statements of Income at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Current U.S. income taxes......... $ 87.6 194.2 172.0 State and local income taxes...... 15.9 11.9 8.3 - -------------------------------------------------------------------------------- Total............................. 103.5 206.1 180.3 - -------------------------------------------------------------------------------- Deferred U.S. income taxes resulting from temporary differences..................... 254.5 81.0 87.4 - -------------------------------------------------------------------------------- Applicable income taxes........... $358.0 287.1 267.7 - -------------------------------------------------------------------------------- Deferred income taxes are included in the caption Accrued Taxes, Interest and Expenses in the Consolidated Balance Sheets and are comprised of the following temporary differences at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Lease financing................... $713.1 476.5 Reserve for credit losses......... ( 125.0) ( 111.6) Bank premises and equipment....... 18.6 17.3 Unrealized gains (losses) on securities available for sale... ( 125.7) 52.0 Other............................. 43.4 13.4 - -------------------------------------------------------------------------------- Total net deferred tax liability.. $524.4 447.6 - -------------------------------------------------------------------------------- A reconciliation between the statutory U.S. income tax rate and the Bancorp's effective tax rate for the years ended December 31: - -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Statutory tax rate................. 35.0% 35.0% 35.0% Increase (Decrease) resulting from: Tax-exempt interest............. (1.7) (2.1) (2.1) Other-net....................... 1.6 1.5 .7 - -------------------------------------------------------------------------------- Effective tax rate................. 34.9% 34.4% 33.6% - -------------------------------------------------------------------------------- Retained earnings at December 31, 1999 includes $132.4 million in allocations of earnings for bad debt deductions of former thrift subsidiaries for which no income tax has been provided. Under current tax law, if certain of the Bancorp's subsidiaries use these bad debt reserves for purposes other than to absorb bad debt losses, they will be subject to Federal income tax at the current corporate tax rate. NOTE 10-RELATED PARTY TRANSACTIONS At December 31, 1999 and 1998, certain directors, executive officers, principal holders of Bancorp common stock and associates of such persons were indebted to the banking subsidiaries in the aggregate amount, net of participations, of $179.9 million and $144.9 million, respectively. Such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time of comparable transactions with unrelated parties. NOTE 11-STOCK OPTIONS AND EMPLOYEE STOCK GRANT The Bancorp has historically emphasized employee stock ownership. Accordingly, the Bancorp encourages further ownership through granting stock options to approximately 18% of its employees. Share grants represented approximately 1.5% of average outstanding shares in each of the last three years. Options can be granted under the Bancorp's 1998 Stock Option Plan to key employees and directors of the Bancorp and its subsidiaries for up to 15.2 million shares of the Bancorp's common stock. Options granted generally have up to ten year terms and vest and become fully exercisable at the end of three years of continued employment. A summary of option transactions during the years ended December 31: 21 24 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1999 1998 1997 AVERAGE Average Average SHARES OPTION Shares Option Shares Option (000'S) PRICE (000'S) Price (000's) Price - -------------------------------------------------------------------------------- Outstanding beginning of year.... 15,054 $33.01 12,543 $23.26 10,324 $16.92 Exercised.... ( 1,926) 21.36 ( 1,539) 17.67 ( 1,855) 14.81 Expired...... ( 268) 54.36 ( 436) 41.78 ( 238) 24.76 Granted...... 4,446 71.41 4,486 55.09 4,312 34.87 - -------------------------------------------------------------------------------- Outstanding end of year....... 17,306 $43.84 15,054 $33.01 12,543 $23.26 - -------------------------------------------------------------------------------- Exercisable end of year....... 11,602 $35.09 9,386 $25.43 7,769 $19.17 - -------------------------------------------------------------------------------- As of December 31, 1999, options outstanding have exercise prices between $3.98 and $73.81 and a weighted average remaining contractual life of 7.4 years. The majority of options outstanding have exercise prices ranging from $15.44 to $73.81 with a weighted average remaining contractual life of 7.4 years. At December 31, 1999, there were 8 million incentive options and 9.3 million nonqualified options outstanding and 7.1 million shares were available for granting additional options. Options outstanding represent 5.6% of the Bancorp's issued shares at December 31, 1999. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Bancorp has elected to disclose pro forma net income and earnings per share amounts as if the fair-value-based method had been applied in measuring compensation costs. The Bancorp's pro forma information for the years ended December 31: - -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Pro forma net income ($ in millions)........ $616.9 516.4 515.9 Pro forma earnings per share................ $ 2.02 1.71 1.73 Pro forma diluted earnings per share........ $ 1.98 1.67 1.70 - -------------------------------------------------------------------------------- Compensation expense in the pro forma disclosures is not indicative of future amounts as options vest over several years and additional grants are generally made each year. The weighted average fair value of options granted was $28.13, $20.44 and $9.47 in 1999, 1998 and 1997, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1999, 1998 and 1997: expected option lives of nine years for all three years; expected dividend yield of 1% for all three years; expected volatility of 25%, 25% and 24% and risk-free interest rates of 5.9%, 4.6% and 5.4%, respectively. On May 3, 1999, the Bancorp issued 86,375 shares of common stock under the 1998 Long-Term Incentive Plan. These shares were awarded to non-officer employees with three or more years of service. The market value of these shares on the date of grant was approximately $6.5 million. This award is being recognized as compensation expense over the two-year vesting period. The unamortized cost is reported as a reduction of shareholders' equity. NOTE 12-COMMITMENTS AND CONTINGENT LIABILITIES The Bancorp, in the normal course of business, is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers in Ohio, Kentucky, Indiana, Michigan, Illinois, Arizona and Florida, and to minimize exposure to fluctuations in interest and foreign currency exchange rates. These financial instruments primarily include commitments to extend credit, standby and commercial letters of credit, foreign exchange contracts, interest rate swap agreements, interest rate floors and caps, purchased options and commitments to sell residential mortgage loans. These instruments involve, to varying degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Bancorp has in particular classes of financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Bancorp credit policies. Collateral, if deemed necessary, is based on management's credit evaluation of the counterparty and may include business assets of commercial borrowers as well as personal property and real estate of individual borrowers and guarantors. A summary of significant commitments and other off-balance-sheet items at December 31: - -------------------------------------------------------------------------------- Contract or Notional Amount ------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Commitments to extend credit......... $9,196.0 8,293.4 Letters of credit (including standby letters of credit)......... 1,458.0 1,467.7 Foreign exchange contracts: Commitments to purchase............ 289.2 97.4 Commitments to sell................ 301.6 99.7 Interest rate swap agreements........ 1,014.9 898.3 Interest rate floors................. 103.9 267.0 Interest rate caps................... 11.9 30.0 Purchased options.................... 75.0 106.0 Commitments to sell residential mortgage loans......... 93.9 322.0 - -------------------------------------------------------------------------------- Commitments to extend credit are agreements to lend. Commitments to extend credit generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. The Bancorp's exposure to credit risk in the event of nonperformance by the other party is the contract amount. Fixed-rate commitments are subject to market risk resulting from fluctuations in interest rates and the Bancorp's exposure is limited to the replacement value of those commitments. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. At December 31, 1999, approximately $577.9 million of standby letters of credit will expire within one year, $790.9 million expire between one to five years and $78.6 million expire thereafter. At December 31, 1999, letters of credit of approximately $10.6 million were issued to commercial customers for a duration of one year or less to facilitate trade payments in domestic and foreign currency transactions. The amount of credit risk involved in issuing letters of credit in the event of nonperformance by the other party is the contract amount. Foreign exchange forward contracts are for future delivery or purchase of foreign currency at a specified price. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from any resultant exposure to movement in foreign currency exchange rates, limiting the Bancorp's exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The Bancorp reduces its market risk for foreign exchange contracts by generally entering into offsetting third-party forward contracts. The foreign exchange contracts outstanding at December 31, 1999 primarily mature in one year or less. The Bancorp enters into forward contracts for future delivery of residential mortgage loans at a specified yield to reduce the interest 22 25 rate risk associated with fixed-rate residential mortgages held for sale and commitments to fund residential mortgage loans. Credit risk arises from the possible inability of the other parties to comply with the contract terms. The majority of the Bancorp's contracts are with U.S. government-sponsored agencies (FNMA, FHLMC). At December 31, 1999, the Bancorp had purchased option contracts and interest rate floor agreements with notional values of $75 million and $103.9 million, respectively, to hedge a portion of the value of mortgage servicing rights against changes in value with changing prepayment rates. The options have an original term of five years and give the Bancorp the right to receive payments on fixed rates ranging from 5.15% to 6.15% and to make payments based on the six-month London Interbank Offering Rate (LIBOR). The Bancorp may receive a payment each quarter on the interest rate floor agreements if the reference index is below the strike rate established at the outset of each transaction. These contracts carry the risk of the counterparty's future ability to perform under the agreements. A market exposure limit is approved for counterparties, contracts are market-to-market and exposures are collateralized in accordance with the Bancorp policy. In 1997, the Bancorp entered into an interest rate swap agreement with a notional principal amount of $200 million in connection with the issuance of $200 million of long-term, fixed-rate capital-qualifying securities. The Bancorp receives fixed-rate payments at 8.136% and pays a variable interest rate based upon three-month LIBOR. The Bancorp has also entered into interest rate contracts to fix the interest costs of certain deposits, repurchase agreements and long-term borrowings to manage its interest rate sensitivity. At December 31, 1999 and 1998, the Bancorp had swaps with notional values of $490 million and $440 million, respectively, which mature on or prior to April 28, 2005. The swaps require the Bancorp to pay a fixed rate of interest ranging from 5.22% to 5.59% and receive a variable rate based on one-month or three-month LIBOR. In addition, the Bancorp has entered into interest rate contracts whereby the Bancorp will receive a fixed rate of interest ranging from 4.85% to 8.71% and pay a variable rate of interest based on various indices. At December 31, 1999, these swaps had a notional value of $95 million and mature on or prior to January 31, 2001. As of December 31, 1999, the Bancorp had entered into interest rate swap agreements with commercial clients and an unconsolidated qualifying special-purpose entity with an aggregate notional principal amount of $41.6 million and $146.7 million, respectively. The agreements generally provide for the Bancorp to receive a fixed rate and pay a variable rate that resets periodically. The Bancorp has hedged its interest rate exposure on transactions with commercial clients by executing offsetting swap agreements with primary dealers. These transactions involve the exchange of fixed and floating interest rate payments without the exchange of the underlying principal amounts. Therefore, while notional principal amounts are typically used to express the volume of these transactions, they do not represent the much smaller amounts that are potentially subject to credit risk. Entering into interest rate swap agreements involves the risk of dealing with counterparties and their ability to meet the terms of the contract. The Bancorp controls the credit risk of these transactions through adherence to a derivative products policy, credit approval policies and monitoring procedures. The Bancorp sells, subject to recourse, certain commercial loans to an unconsolidated qualifying special-purpose entity. At December 31, 1999 and 1998, the outstanding balance of these loans, excluding trust preferred shares, was $1.4 billion and $1.1 billion, respectively. The Bancorp did not repurchase any of these loans during 1999 or 1998. There are claims pending against the Bancorp and its subsidiaries. Based on a review of such litigation with legal counsel, management believes any resulting liability would not have a material effect upon the Bancorp's consolidated financial position or results of operations. NOTE 13-OTHER SERVICE CHARGES AND FEES AND OTHER OPERATING EXPENSES The major components of other service charges and fees and other operating expenses for the years ended December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Other Service Charges and Fees: Cardholder fees......................... $ 33.8 30.9 29.1 Consumer loan and lease fees............ 43.0 34.9 29.4 Commercial banking...................... 63.1 43.9 30.0 Mortgage banking........................ 97.2 95.9 62.9 Other................................... 100.7 87.7 73.9 - -------------------------------------------------------------------------------- Total other service charges and fees................................ $337.8 293.3 225.3 - -------------------------------------------------------------------------------- Other Operating Expenses: Marketing and communications........................ $ 71.4 63.6 59.7 Bankcard................................ 55.1 44.6 34.5 Intangibles amortization................ 35.7 32.2 29.9 Franchise taxes......................... 25.6 27.3 28.5 Loan and lease......................... 32.3 26.2 19.0 Printing and supplies................... 21.3 22.2 22.4 FDIC insurance.......................... 7.5 8.2 8.2 Other................................... 164.0 154.2 141.5 - -------------------------------------------------------------------------------- Total other operating expenses............ $412.9 378.5 343.7 - -------------------------------------------------------------------------------- NOTE 14-RETIREMENT AND BENEFIT PLANS A combined summary of the defined benefit retirement plans at and for the years ended December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Change in benefit obligation: Projected benefit obligation at beginning of year.................... $139.6 110.3 Service cost.......................... 4.5 5.2 Interest cost......................... 8.1 7.7 Curtailment........................... -- ( 17.4) Acquisition/divestiture............... -- 23.8 Amendments............................ 1.8 6.2 Actuarial loss (gain)................. ( 11.7) 12.5 Benefits paid......................... ( 16.7) ( 8.7) - -------------------------------------------------------------------------------- Projected benefit obligation at end of year........................... $125.6 139.6 - -------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year................... $202.4 153.4 Actual return on assets............... 26.2 26.8 Contributions......................... .1 .6 Acquired plan......................... -- 30.3 Benefits paid......................... ( 16.7) ( 8.7) - -------------------------------------------------------------------------------- Fair value of plan assets at end of year............................... $212.0 202.4 - -------------------------------------------------------------------------------- Funded status........................... $ 86.3 62.8 Unrecognized transition amount.......... ( 2.7) ( 3.4) Unrecognized actuarial gain............. ( 55.5) ( 32.6) - -------------------------------------------------------------------------------- Unrecognized prior service cost......... 6.0 4.7 - -------------------------------------------------------------------------------- Net amount recognized................... $ 34.1 31.5 - -------------------------------------------------------------------------------- Amounts recognized in the Consolidated Balance Sheets consist of: Prepaid benefit cost.................... $ 45.8 42.2 Accrued benefit liability............... ( 11.7) ( 10.7) - -------------------------------------------------------------------------------- Net amount recognized................... $ 34.1 31.5 - -------------------------------------------------------------------------------- 23 26 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Components of net periodic pension cost: Service cost............................... $ 4.5 5.2 5.6 Interest cost.............................. 8.1 7.7 7.3 Curtailment................................ -- (12.2) -- Expected return on assets.................. (15.8) (13.1) (10.5) Amortization and deferral of transition amount........................ ( .7) ( .6) ( .6) Amortization of actuarial gain............. ( 2.9) (1.3) -- Amortization of unrecognized prior service cost............................. .5 .2 -- - -------------------------------------------------------------------------------- Net periodic pension cost (benefit).......... $( 6.3) (14.1) 1.8 - -------------------------------------------------------------------------------- Plan assets consist primarily of common trust and mutual funds managed by Fifth Third Bank, an affiliate of the Bancorp, listed stocks and U.S. bonds. - -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Weighted-average assumptions: For disclosure: Discount rate......................... 7.75% 6.83% 7.22% Rate of compensation increase......... 5.14 4.87 4.87 For measuring net periodic pension cost: Discount rate......................... 6.83 7.22 7.66 Rate of compensation increase......... 4.87 4.87 4.93 Expected return on plan assets........ 9.31 9.30 8.98 - -------------------------------------------------------------------------------- During 1998, to emphasize 401(k) and employer matching, the Bancorp froze its defined benefit pension plan and all benefits earned to date became fully vested. For the Bancorp's nonqualified supplemental defined benefit plans, with an accumulated benefit obligation exceeding assets, the total projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $14.7 million, $10.3 million and $0, respectively as of December 31, 1999 and $11.8 million, $9.1 million and $0, respectively as of December 31, 1998. The Bancorp's profit sharing plan contribution was $25.2 million for 1999, $25 million for 1998 and $25.6 million for 1997. NOTE 15-REGULATORY MATTERS The principal source of income and funds for the Bancorp (parent company) are dividends from its subsidiaries. During 2000, the amount of dividends the subsidiaries can pay to the Bancorp without prior approval of regulatory agencies is limited to their 2000 eligible net profits, as defined, and the adjusted retained 1999 and 1998 net income of the subsidiaries. The affiliate banks must maintain noninterest-bearing cash balances on reserve with the Federal Reserve Bank (FRB). In 1999 and 1998, the banks were required to maintain average reserve balances of $328.5 million and $297.7 million, respectively. The FRB adopted quantitative measures which assign risk weightings to assets and off-balance-sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios). All banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders' equity including capital-qualifying subordinated debt but excluding unrealized gains and losses on securities available for sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitation. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements of the Bancorp. The regulations also define well-capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. The Bancorp and each of its subsidiaries had Tier 1, total capital and leverage ratios above the well-capitalized levels at December 31, 1999 and 1998. The risk-based capital ratios of certain affiliates have been computed on a pro forma basis to include inter-affiliate mergers, which were approved by the appropriate regulatory agencies prior to year end and occurred in the following January. As of December 31, 1999, the most recent notification from the FRB categorized the Bancorp and each of its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. Capital and risk-based capital and leverage ratios for the Bancorp and its significant subsidiaries at December 31: - -------------------------------------------------------------------------------- 1999 --------------------- ($ in millions) AMOUNT RATIO - -------------------------------------------------------------------------------- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated)....... $4,926.1 17.94% Fifth Third Bank, Cincinnati............. 1,506.7 13.12 Fifth Third Bank, Northwestern Ohio, N.A. ............................ 481.5 12.79 Fifth Third Bank, Kentucky, Inc. ........ 196.9 14.15 Fifth Third Bank, Western Ohio........... 454.8 13.81 Fifth Third Bank, Central Ohio........... 306.7 12.55 Civitas Bank............................. 594.8 12.55 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated)....... 4,240.1 15.44 Fifth Third Bank, Cincinnati............. 936.4 8.15 Fifth Third Bank, Northwestern Ohio, N.A. ............................ 338.9 9.00 Fifth Third Bank, Kentucky, Inc. ........ 179.5 12.90 Fifth Third Bank, Western Ohio........... 367.5 11.15 Fifth Third Bank, Central Ohio........... 276.2 11.30 Civitas Bank ............................ 537.0 11.33 TIER 1 LEVERAGE CAPITAL (TO AVERAGE ASSETS): Fifth Third Bancorp (Consolidated)....... 4,240.1 10.11 Fifth Third Bank, Cincinnati............. 936.4 6.81 Fifth Third Bank, Northwestern Ohio, N.A. ............................ 338.9 6.18 Fifth Third Bank, Kentucky, Inc.......... 179.5 8.94 Fifth Third Bank, Western Ohio........... 367.5 6.82 Fifth Third Bank, Central Ohio .......... 276.2 8.33 Civitas Bank ............................ 537.0 6.97 - -------------------------------------------------------------------------------- 1998 ---------------------- ($ in millions) AMOUNT RATIO - -------------------------------------------------------------------------------- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated)....... $4,225.5 14.44% Fifth Third Bank, Cincinnati............. 1,221.0 10.71 Fifth Third Bank, Northwestern Ohio, N.A. ............................ 434.0 13.75 Fifth Third Bank, Kentucky, Inc. ........ 199.0 14.59 Fifth Third Bank, Western Ohio .......... 366.0 10.29 Fifth Third Bank, Central Ohio .......... 303.0 12.04 Civitas Bank............................. 569.9 13.04 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated)....... 3,648.5 12.47 Fifth Third Bank, Cincinnati............. 787.0 6.90 Fifth Third Bank, Northwestern Ohio, N.A. ............................ 299.0 9.46 Fifth Third Bank, Kentucky, Inc. ........ 182.0 13.35 Fifth Third Bank, Western Ohio .......... 302.0 8.49 Fifth Third Bank, Central Ohio........... 272.0 10.77 Civitas Bank............................. 515.3 11.79 TIER 1 LEVERAGE CAPITAL (TO AVERAGE ASSETS): Fifth Third Bancorp (Consolidated)....... 3,648.5 10.09 Fifth Third Bank, Cincinnati............. 787.0 7.46 Fifth Third Bank, Northwestern Ohio, N.A. ............................ 299.0 5.95 Fifth Third Bank, Kentucky, Inc. ........ 182.0 8.55 Fifth Third Bank, Western Ohio........... 302.0 6.39 Fifth Third Bank, Central Ohio........... 272.0 7.69 Civitas Bank ............................ 515.3 7.47 - -------------------------------------------------------------------------------- 24 27 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16-NONOWNER CHANGES IN EQUITY Reclassification adjustments, related tax effects allocated to nonowner changes in equity and accumulated nonowner changes in equity as of and for the years ended December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Reclassification adjustment, pretax: Change in unrealized gains (losses) arising during year.................... $(497.7) ( 29.2) 138.0 Reclassification adjustment for gains in net income.................... .6 12.3 8.5 - -------------------------------------------------------------------------------- Change in unrealized gains (losses) on securities available for sale $(497.1) ( 16.9) 146.5 - -------------------------------------------------------------------------------- Related tax effects: Change in unrealized gains (losses) arising during year.................... $(178.2) ( 10.4) 48.6 Reclassification adjustment for gains in net income.................... .2 4.4 3.0 - -------------------------------------------------------------------------------- Change in unrealized gains (losses) on securities available for sale....... $(178.0) ( 6.0) 51.6 - -------------------------------------------------------------------------------- Reclassification adjustment, net of tax: Change in unrealized gains (losses) arising during year.................... $(319.5) ( 18.8) 89.4 Reclassification adjustment for gains in net income.................... .4 7.9 5.5 - -------------------------------------------------------------------------------- Change in unrealized gains (losses) on securities available for sale....... $(319.1) ( 10.9) 94.9 - -------------------------------------------------------------------------------- Accumulated nonowner changes in equity: Beginning balance-- Unrealized gains on securities available for sale ......... $ 94.6 105.5 10.6 Current period change.................... (319.1) ( 10.9) 94.9 - -------------------------------------------------------------------------------- Ending balance-- Unrealized gains (losses) on securities available for sale.......... $(224.5) 94.6 105.5 - -------------------------------------------------------------------------------- NOTE 17-MORTGAGE SERVICING RIGHTS Changes in capitalized mortgage servicing rights for the years ended December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Balance beginning of period............... $81.2 64.6 Amount capitalized........................ 45.3 35.1 Amortization.............................. (18.5) (13.9) Sales..................................... (18.3) -- Valuation allowance....................... 9.2 ( 4.6) - -------------------------------------------------------------------------------- Balance, end of period ................... $98.9 81.2 - -------------------------------------------------------------------------------- The fair value of capitalized servicing rights was $139.6 million at December 31, 1999 and $87.8 million at December 31, 1998. The Bancorp serviced $11.4 billion of residential mortgage loans for other investors at December 31, 1999 and $11.8 billion at December 31, 1998. NOTE 18-ACQUISITIONS - -------------------------------------------------------------------------------- CONSIDERATION ----------------- COMMON DATE CASH SHARES METHOD OF COMPLETED ($000'S) ISSUED ACCOUNTING - -------------------------------------------------------------------------------- Peoples Bank Corporation 11/19/99 $ -- 3,381,220 Pooling of Indianapolis Indianapolis, Indiana CNB Bancshares, Inc. 10/29/99 -- 30,370,745 Pooling Evansville, Indiana Emerald Financial Corp. 8/6/99 7 3,379,539 Pooling Strongsville, Ohio Vanguard Financial Co. 7/9/99 85 72,082 Purchase Cincinnati, Ohio South Florida Bank 6/11/99 17 442,560 Purchase Holding Corporation Ft. Myers, Florida Enterprise Federal 5/14/99 17 1,676,596 Purchase Bancorp, Inc. Cincinnati, Ohio Ashland Bankshares, Inc. 4/16/99 10 1,224,860 Purchase Ashland, Kentucky CitFed Bancorp, Inc. 6/26/98 51 13,222,869 Pooling Dayton, Ohio State Savings Company 6/19/98 4 16,625,271 Pooling Columbus, Ohio The Ohio Company 6/12/98 2 1,862,765 Purchase Columbus, Ohio W. Lyman Case 4/9/98 15,000 -- Purchase and Company Columbus, Ohio Heartland Capital 11/24/97 -- 351,004 Purchase Management, Inc. Indianapolis, Indiana Suburban 7/25/97 11 870,218 Purchase Bancorporation, Inc. Cincinnati, Ohio - -------------------------------------------------------------------------------- The assets, liabilities and shareholders' equity of the pooled entities were recorded on the books of the Bancorp at their values as reported on the books of the pooled entities immediately prior to the consummation of the merger with the Bancorp. This presentation required the restatements of prior periods as if the companies had been combined for all years presented. The contributions of the pooled entities to consolidated net interest income, other operating income and net income for the periods prior to the mergers were as follows: 25 28 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- YEAR THROUGH Years Ended SEPTEMBER 30, December 31, ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- NET INTEREST INCOME - -------------------------------------------------------------------------------- Fifth Third Bancorp......... $ 835.8 1,002.8 912.3 CNB Bancshares, Inc. ....... 189.4 233.7 232.5 Other ...................... 23.5 33.4 28.7 - -------------------------------------------------------------------------------- Combined ................... $1,048.7 1,269.9 1,173.5 - -------------------------------------------------------------------------------- OTHER OPERATING INCOME - -------------------------------------------------------------------------------- Fifth Third Bancorp......... $ 559.4 636.2 501.8 CNB Bancshares, Inc. ....... 84.6 109.8 82.0 Other ...................... 5.9 7.5 6.6 - -------------------------------------------------------------------------------- Combined.................... $ 649.9 753.5 590.4 - -------------------------------------------------------------------------------- NET INCOME - -------------------------------------------------------------------------------- Fifth Third Bancorp......... $ 485.5 476.1 460.9 CNB Bancshares, Inc. ....... 68.2 61.6 59.9 Other....................... ( 1.8) 8.8 8.6 - -------------------------------------------------------------------------------- Combined.................... $ 551.9 546.5 529.4 - -------------------------------------------------------------------------------- The combined consolidated results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated in the past or which may be attained in the future. In the fourth quarter of 1999 as a direct result of the Peoples and CNB acquisitions, the Bancorp recorded merger-related costs of $108.4 million ($83.8 million after tax), of which $82.1 million was recorded as operating expense and $26.3 million was recorded as additional provision for credit losses. The charge to operating expenses consisted of employee severance and benefit obligations, costs to eliminate duplicate facilities and equipment, contract terminations, conversion expenses and professional fees. The additional provision for credit losses was charged in connection with a change in the management of Peoples and CNB problem loans and to conform Peoples and CNB to the Bancorp's reserve and charge-off practices. Merger-related costs in 1998 of $121.3 million were associated with the mergers of the Bancorp with CitFed Bancorp, Inc. and State Savings Company and with the merger of CNB Bancshares, Inc. and Pinnacle Financial Services, Inc. The merger-related charges consist of: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Employee severence and benefit obligations............................... $28.6 59.7 Duplicate facilities and equipment.......... 14.4 18.4 - -------------------------------------------------------------------------------- Conversion expenses and professional fees......................... 22.6 28.2 Contract termination costs.................. 4.5 2.9 Other ...................................... 12.0 12.1 - -------------------------------------------------------------------------------- Merger-related charge ...................... $82.1 121.3 - -------------------------------------------------------------------------------- Summary of merger-related accrual activity at December 31: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 - -------------------------------------------------------------------------------- Balance January 1........................... $31.6 -- Merger-related charge....................... 82.1 121.3 Cash payments............................... (57.3) ( 71.3) Noncash writedowns.......................... (22.6) ( 18.4) - -------------------------------------------------------------------------------- Balance December 31......................... $33.8 31.6 - -------------------------------------------------------------------------------- The Bancorp expects to incur additional merger-related costs during the first quarter of 2000 in connection with the integration of CNB Bancshares Inc. The pro forma effect and the financial results of Vanguard Financial Co., Enterprise Federal Bancorp, Inc., South Florida Bank Holding Corp., and Ashland Bankshares, Inc. included in the results of operations subsequent to the date of the acquisitions, were not material to the Bancorp's financial condition and operating results for the periods presented. NOTE 19-EARNINGS PER SHARE Reconciliation of Earnings Per Share to Diluted Earnings Per Share for the years ended December 31: - -------------------------------------------------------------------------------- 1999 ---------------------------- AVERAGE PER-SHARE ($ in millions, except per share amounts) INCOME SHARES AMOUNT - -------------------------------------------------------------------------------- EPS Income available to common shareholders................... $668.2 306,119 $2.18 EFFECT OF DILUTIVE SECURITIES Stock Options........................... 5,507 Interest on 6% convertible subordinated debentures due 2028, net of applicable income taxes............................ 6.7 2,944 - -------------------------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions............. $674.9 314,570 $2.15 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1998 ---------------------------- Average Per-Share ($ in millions, except per share amounts) Income Shares Amount - -------------------------------------------------------------------------------- EPS Income available to common shareholders................... $546.5 301,335 $1.81 EFFECT OF DILUTIVE SECURITIES Stock Options........................... 5,945 Interest on 6% convertible subordinated debentures due 2028, net of applicable income taxes.......................... 3.3 1,472 - -------------------------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions.............. $549.8 308,752 $1.78 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1997 ---------------------------- Average Per-Share ($ in millions, except per share amounts) Income Shares Amount - -------------------------------------------------------------------------------- EPS Income available to common shareholders................... $529.4 297,864 $1.78 EFFECT OF DILUTIVE SECURITIES Stock Options 4,963 - -------------------------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions.............. $529.4 302,827 $1.75 - -------------------------------------------------------------------------------- Options to purchase 3.1 million shares were outstanding at December 31, 1999 and were not included in the computation of diluted net income per share because the exercise price of these options was greater than the average market price of the common shares, and therefore, the effect would be antidilutive. 26 29 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 20-FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts and estimated fair values for financial instruments at December 31: - -------------------------------------------------------------------------------- 1999 ----------------------- CARRYING FAIR ($ in millions) AMOUNT VALUE - -------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks ............... $ 1,213.1 1,213.1 Securities available for sale ......... 12,687.5 12,687.5 Securities held to maturity ........... 129.1 129.1 Other short-term investments .......... 355.4 355.4 Loans held for sale ................... 297.1 297.3 Loans, net ............................ 19,616.1 19,115.5 Accrued interest receivable ........... 321.0 321.0 FINANCIAL LIABILITIES Deposits .............................. 25,886.1 25,050.0 Federal funds borrowed ................ 2,971.9 2,995.0 Short-term bank notes ................. 1,317.4 1,317.4 Other short-term borrowings ........... 4,084.4 4,009.9 Accrued interest payable .............. 137.8 137.8 Long-term debt ........................ 1,803.8 1,821.2 Guaranteed preferred beneficial interests in convertible subordinated debentures .......................... 172.5 240.0 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Commitments to extend credit .......... .1 16.6 Letters of credit ..................... 3.3 15.9 Purchased options ..................... .7 .6 Interest rate swap agreements ......... -- 2.9 Interest rate floors .................. -- ( .2) Interest rate caps .................... -- .4 Forward contracts: Commitments to sell loans ........... -- .5 Foreign exchange contracts: Commitments to purchase ........... -- 1.8 Commitments to sell ............... -- ( 3.2) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1998 ----------------------- CARRYING FAIR ($ in millions) AMOUNT VALUE - -------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and due from banks ............... $ 1,045.4 1,045.4 Securities available for sale ......... 11,183.9 11,183.9 Securities held to maturity ........... 121.9 121.9 Other short-term investments .......... 164.7 164.7 Loans held for sale ................... 588.9 588.9 Loans, net ............................ 18,346.3 18,623.6 Accrued interest receivable ........... 343.4 343.4 FINANCIAL LIABILITIES Deposits .............................. 24,495.8 23,536.9 Federal funds borrowed ................ 2,137.9 2,137.9 Other short-term borrowings ........... 2,376.7 2,376.7 Accrued interest payable .............. 117.7 117.7 Long-term debt ........................ 3,063.6 3,136.2 Guaranteed preferred beneficial interests in convertible subordinated debentures .......................... 172.5 193.6 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS Commitments to extend credit .......... .6 33.5 Letters of credit ..................... 2.9 13.0 Purchased options ..................... 3.6 3.7 Interest rate swap agreements ......... -- 20.3 Interest rate floors .................. 3.9 3.7 Interest rate caps .................... .1 -- Forward contracts: Commitments to sell loans ........... -- .7 Foreign exchange contracts: Commitments to purchase ........... -- 2.5 Commitments to sell ............... -- ( 2.1) - -------------------------------------------------------------------------------- Fair values for financial instruments were based on various assumptions and estimates as of a specific point in time, represent liquidation values and may vary significantly from amounts that will be realized in actual transactions. In addition, certain financial instruments and all non-financial instruments were excluded from the fair value disclosure requirements. Therefore, the fair values presented in the adjacent table should not be construed as the underlying value of the Bancorp. The following methods and assumptions were used in determining the fair value of selected financial instruments: SHORT-TERM FINANCIAL ASSETS AND LIABILITIES-for financial instruments with a short or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, other short-term investments, accrued interest receivable, certain deposits (demand, interest checking, savings and money market), Federal funds borrowed, short-term bank notes, other short-term borrowings and accrued interest payable. SECURITIES, AVAILABLE FOR SALE AND HELD TO MATURITY-fair values were based on quoted market prices, dealer quotes and prices obtained from independent pricing services. LOANS-fair values were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. LOANS HELD FOR SALE-the fair value of loans held for sale is estimated based on outstanding commitments from investors or current investor yield requirements. DEPOSITS-fair values for other time, certificates of deposit-$100,000 and over and foreign office were estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities. LONG-TERM DEBT-fair value of long-term debt was based on quoted market prices, when available, and a discounted cash flow calculation using prevailing market rates for borrowings of similar terms. COMMITMENTS AND LETTERS OF CREDIT-fair values of loan commitments, letters of credit and commitments to sell loans, representing assets to the Bancorp, were based on fees currently charged to enter into similar agreements with similar maturities. INTEREST RATE SWAP AGREEMENTS-fair value was based on the estimated amount the Bancorp would receive or pay to terminate the swap agreements, taking into account the current interest rates and the creditworthiness of the swap counterparties. The fair values represent an asset at December 31, 1999. PURCHASED OPTIONS AND INTEREST RATE FLOORS AND CAPS-fair values were based on the estimated amounts the Bancorp would receive from terminating the contracts at the reporting date. FOREIGN EXCHANGE CONTRACTS-fair values were based on quoted market prices of comparable instruments and represent a net asset to the Bancorp. 27 30 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 21-PARENT COMPANY FINANCIAL STATEMENTS The condensed financial statements of the Bancorp ($ in millions):
- ----------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY) For the Years Ended December 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------- INCOME Dividends from Subsidiaries ............................... $ 507.2 491.3 603.8 Interest on Loans to Subsidiaries ............................................ 34.9 27.0 8.3 Securities Losses ......................................... -- -- (.2) Other ..................................................... 3.2 15.0 12.9 - ----------------------------------------------------------------------------------------------- TOTAL INCOME .............................................. 545.3 533.3 624.8 - ----------------------------------------------------------------------------------------------- EXPENSES Interest .................................................. 23.8 22.6 15.6 Other ..................................................... 30.8 48.6 34.9 - ----------------------------------------------------------------------------------------------- TOTAL EXPENSES ............................................ 54.6 71.2 50.5 - ----------------------------------------------------------------------------------------------- INCOME BEFORE TAXES AND CHANGE IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES ................................ 490.7 462.1 574.3 Applicable Income Tax Benefit ............................. (3.3) ( 6.3) ( 8.2) - ----------------------------------------------------------------------------------------------- INCOME BEFORE CHANGE IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES ............................................ 494.0 468.4 582.5 Increase (Decrease) in Undistributed Earnings of Subsidiaries ................................ 174.2 78.1 (53.1) - ----------------------------------------------------------------------------------------------- NET INCOME ................................................ $ 668.2 546.5 529.4 - -----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------- CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) December 31 1999 1998 - ----------------------------------------------------------------------------------------------- ASSETS Cash ...................................................... $ .8 3.6 Interest-Bearing Deposits ................................. 11.5 114.9 Securities Available for Sale ............................. .9 3.6 Loans to Subsidiaries ..................................... 1,107.8 833.4 Investment in Subsidiaries ................................ 3,272.4 3,291.3 Goodwill .................................................. 150.3 9.9 Other Assets .............................................. 56.9 33.6 - ----------------------------------------------------------------------------------------------- TOTAL ASSETS .............................................. $ 4,600.6 4,290.3 - ----------------------------------------------------------------------------------------------- LIABILITIES Commercial Paper .......................................... $ 18.3 46.0 Accrued Expenses and Other Liabilities .................... 127.5 68.9 Long-Term Debt ............................................ 200.0 202.5 Guaranteed Preferred Beneficial Interest in Convertible Subordinated Debentures .................. 177.8 177.8 - ----------------------------------------------------------------------------------------------- TOTAL LIABILITIES ......................................... 523.6 495.2 - ----------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY ...................................... 4,077.0 3,795.1 - ----------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................... $ 4,600.6 4,290.3 - -----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) For the Years Ended December 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income ................................................ $ 668.2 546.5 529.4 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Amortization/Depreciation ............................... .8 1.3 1.4 Provision for Deferred Income Taxes ........................................ 1.6 (3.2) 1.6 Securities Losses ..................................... -- -- .2 Decrease (Increase) in Other Assets ........................................ (23.3) 9.1 (9.0) Increase (Decrease) in Accrued Expenses and Other Liabilities....................... 58.6 2.3 (4.1) - ----------------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOW (PARENT COMPANY ONLY) For the Years Ended December 31 ..................... 1999 1998 1997 - ----------------------------------------------------------------------------------------------- Decrease (Increase) in Undistributed Earnings of Subsidiaries ........................................ (174.2) (78.1) 53.1 - ----------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES .................................... 531.7 477.9 572.6 - ----------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale ........................... 2.7 3.2 8.5 Net Decrease (Increase) in Interest-Bearing Deposits ............................... 103.4 (37.0) (37.6) Increase in Loans to Subsidiaries ......................................... (274.4) (299.2) (219.0) Capital Contributions to Subsidiaries ( 13.4) ( 87.1) (104.9) - ----------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES .................................... (181.7) (420.1) (353.0) - ----------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase (Decrease) in Other Short-Term Borrowings ................................... (27.7) 17.7 1.0 Proceeds from Issuance of Long-Term Debt ....................................... -- 10.0 235.0 Repayment of Long-Term Debt ............................... -- (82.3) (7.1) Proceeds from Sale of Convertible Subordinated Debentures ................................. -- 177.8 -- Payment of Cash Dividends ................................. (269.0) (167.9) (133.8) Purchases of Treasury Stock ............................... -- (199.1) (316.9) Exercise of Stock Options ................................. 53.7 27.0 28.2 Proceeds from Sale of Common Stock ............................................ -- 178.1 -- Other ..................................................... (109.8) (30.3) (24.3) - ----------------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES .................................... (352.8) (69.0) (217.9) - ----------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH ............................... (2.8) (11.2) 1.7 CASH AT BEGINNING OF YEAR ................................. 3.6 14.8 13.1 - ----------------------------------------------------------------------------------------------- CASH AT END OF YEAR ....................................... $ .8 3.6 14.8 - -----------------------------------------------------------------------------------------------
NOTE 22-SEGMENTS The Bancorp's principal activities include Retail Banking, Commercial Banking, Investment Advisory Services and Data Processing. Retail Banking provides a full range of deposit products and consumer loans and leases. Commercial Banking offers services to business, government and professional customers. Investment Advisory Services provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Data Processing, through Midwest Payment Systems (MPS), provides electronic funds transfer (EFT) services, merchant transaction processing, operates our Jeanie ATM network and provides other data processing services to affiliated and unaffiliated customers. General Corporate and Other includes the investment portfolio, certain non-deposit funding, unassigned equity, the net effect of funds transfer pricing and other items not allocated to operating segments. The financial information for each operating segment is reported on the basis used internally by the Bancorp's management to evaluate performance and allocate resources. The allocation has been consistently applied for all periods presented. Revenues from affiliated transactions, principally EFT data processing services from MPS to the banking segments, are charged generally at rates available to and transacted with unaffiliated customers. The measurement of the performance of the operating segments is based on the management structure of the Bancorp and is not necessarily comparable with similar information for any other financial institution. The information presented is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities. 28 31 FIFTH THIRD BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Bancorp did not allocate resources or assess the ongoing operating performance of acquired entities prior to acquisition. Therefore, financial information prior to acquisition is shown separately as acquired entities. Following acquisition, results of operations are included in the Bancorp's segment information for the acquired entities. Results of operations and selected financial information by operating segment for each of the three years ended December 31:
- ----------------------------------------------------------------------------------------------------------------------------- INVESTMENT DATA GENERAL COMMERCIAL RETAIL ADVISORY PROCESS- ACQUIRED CORPORATE ELIMINA- ($ in millions) BANKING BANKING SERVICES ING(a) ENTITIES OTHER TIONS(a) TOTAL - ----------------------------------------------------------------------------------------------------------------------------- 1999 RESULTS OF OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income (Expense) ..... $ 367.6 677.8 35.5 ( 1.9) 280.8 44.8 -- 1,404.6 Provision for Credit Losses ....... 36.0 54.7 2.3 -- 41.0 -- -- 134.0 - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income (Expense) After Provision for Credit Losses ..... 331.6 623.1 33.2 ( 1.9) 239.8 44.8 -- 1,270.6 Other Operating Income ............ 113.6 291.0 173.9 196.0 121.6 ( 3.9) (15.2) 877.0 Merger-Related Charges ............ -- -- -- -- 82.1 -- -- 82.1 Operating Expenses ................ 150.0 407.6 108.0 100.1 240.6 48.8 (15.2) 1,039.9 - ----------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes ........ 295.2 506.5 99.1 94.0 38.7 ( 7.9) -- 1,025.6 Applicable Income Taxes ........... 100.4 172.3 33.7 32.0 25.0 ( 5.6) -- 357.8 After Tax Securities Gains (Losses) -- -- -- -- 1.3 ( .9) -- .4 - ----------------------------------------------------------------------------------------------------------------------------- Net Income ........................ $ 194.8 334.2 65.4 62.0 15.0 ( 3.2) -- 668.2 - ----------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - ----------------------------------------------------------------------------------------------------------------------------- Identifiable Assets ............... $8,869.3 13,438.7 436.4 93.5 7,514.4 11,237.2 -- 41,589.5 Capital Expenditures .............. $ .2 71.2 -- 15.1 26.1 3.7 -- 116.3 Depreciation and Amortization ..... $ .3 7.4 .4 1.1 18.4 25.3 -- 52.9 - ----------------------------------------------------------------------------------------------------------------------------- 1998 RESULTS OF OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income (Expense) ..... $ 301.9 542.0 31.2 ( 1.3) 335.5 60.6 -- 1,269.9 Provision for Credit Losses ....... 54.0 30.7 .9 -- 37.9 -- -- 123.5 - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income (Expense) After Provision for Credit Losses ............... 247.9 511.3 30.3 ( 1.3) 297.6 60.6 -- 1,146.4 Other Operating Income ............ 76.2 236.0 133.3 152.7 139.5 18.0 (14.5) 741.2 Merger-Related Charges ............ -- -- -- -- 121.3 -- -- 121.3 Operating Expenses ................ 119.7 321.9 88.2 82.2 284.0 63.5 (14.5) 945.0 - ----------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes ........ 204.4 425.4 75.4 69.2 31.8 15.1 -- 821.3 Applicable Income Taxes ........... 69.5 144.6 25.6 23.6 15.6 3.8 -- 282.7 After Tax Securities Gains ........ -- -- -- -- 1.6 6.3 -- 7.9 - ----------------------------------------------------------------------------------------------------------------------------- Net Income ........................ $ 134.9 280.8 49.8 45.6 17.8 17.6 -- 546.5 - ----------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - ----------------------------------------------------------------------------------------------------------------------------- Identifiable Assets ............... $7,713.3 11,515.0 374.7 86.8 8,170.7 9,231.8 -- 37,092.3 Capital Expenditures .............. $ 6.1 49.7 1.0 7.8 17.8 -- -- 82.4 Depreciation and Amortization ..... $ .3 5.9 .4 1.0 18.6 20.3 -- 46.5 - ----------------------------------------------------------------------------------------------------------------------------- 1997 RESULTS OF OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income (Expense) ..... $ 240.7 432.1 24.9 ( 1.0) 428.5 48.3 -- 1,173.5 Provision for Credit Losses ....... 15.8 64.5 -- -- 36.6 -- -- 116.9 - ----------------------------------------------------------------------------------------------------------------------------- Net Interest Income (Expense) After Provision for Credit Losses ............... 224.9 367.6 24.9 ( 1.0) 391.9 48.3 -- 1,056.6 Other Operating Income ............ 56.0 173.5 90.2 120.0 142.2 7.5 ( 7.5) 581.9 Operating Expenses ................ 93.1 250.5 52.3 68.4 343.7 49.4 ( 7.5) 849.9 - ----------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes ........ 187.8 290.6 62.8 50.6 190.4 6.4 -- 788.6 Applicable Income Taxes ........... 63.9 98.8 21.3 17.2 64.0 ( .5) -- 264.7 After Tax Securities Gains ........ -- -- -- -- 1.7 3.8 -- 5.5 - ----------------------------------------------------------------------------------------------------------------------------- Net Income ........................ $ 123.9 191.8 41.5 33.4 128.1 10.7 -- 529.4 - ----------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL INFORMATION - ----------------------------------------------------------------------------------------------------------------------------- Identifiable Assets ............... $6,414.2 8,151.9 330.1 73.4 13,805.1 6,405.5 -- 35,180.2 Capital Expenditures .............. $ 3.4 34.0 1.7 3.5 36.3 -- -- 78.9 Depreciation and Amortization ..... $ .7 4.4 1.1 2.6 18.8 15.2 -- 42.8 - -----------------------------------------------------------------------------------------------------------------------------
(a) Data processing service revenues provided to the banking segments by MPS are eliminated in the Consolidated Statements of Income. 29 32 FIFTH THIRD BANCORP AND SUBSIDIARIES INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Directors of Fifth Third Bancorp: We have audited the accompanying consolidated balance sheets of Fifth Third Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Companies at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /S/ Deloitte L. Touche LLP Cincinnati, Ohio January 14, 2000 33 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, that involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include the economic environment, competition, products and pricing in geographic and business areas in which the Bancorp operates, prevailing interest rates, changes in government regulations and policies affecting financial services companies, credit quality and credit risk management, changes in the banking industry including the effects of consolidation resulting from possible mergers of financial institutions, acquisitions and integration of acquired businesses. Fifth Third Bancorp undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report. The data presented in the following pages should be read in conjunction with the audited Consolidated Financial Statements on pages 13 to 30 of this report.
TABLE 1-CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME For the Years Ended December 31 (Taxable Equivalent Basis) - --------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 --------------------------------- ------------------------------- ------------------------------ AVERAGE AVERAGE Average Average Average Average OUT- REVENUE/ YIELD/ Out- Revenue/ Yield/ Out- Revenue/ Yield/ ($ in millions) STANDING COST RATE standing Cost Rate standing Cost Rate - --------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-Earning Assets Loans and Leases................. $24,382.6 $1,964.0 8.05% $22,542.6 $1,901.2 8.43% $21,129.8 $1,799.1 8.51% Securities Taxable......................... 11,658.3 776.3 6.66 10,379.2 686.7 6.62 9,731.0 668.8 6.87 Exempt from Income Taxes........ 775.7 59.7 7.70 673.2 48.8 7.25 538.7 41.4 7.69 Other Short-Term Investments..... 221.3 11.6 5.24 255.7 10.4 4.07 346.2 19.4 5.60 - --------------------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets...... 37,037.9 2,811.6 7.59 33,850.7 2,647.1 7.82 31,745.7 2,528.7 7.97 - --------------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks ........... 953.3 884.2 727.9 Other Assets ...................... 2,108.4 1,752.6 1,495.2 Reserve for Credit Losses ......... ( 355.2) ( 319.9) ( 292.3) - --------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS....................... $39,744.4 $36,167.6 $ 33,676.5 - --------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Interest-Bearing Liabilities Interest Checking................ $ 3,813.1 $ 78.6 2.06% $ 3,347.4 $ 73.5 2.20% $ 2,921.4 $ 68.4 2.34% Savings.......................... 4,210.8 116.5 2.77 4,082.1 128.2 3.14 3,023.3 96.3 3.19 Money Market..................... 1,852.6 74.8 4.04 1,821.4 B 73.8 4.05 2,666.8 104.5 3.92 Other Time Deposits.............. 8,655.9 440.1 5.08 9,353.2 B514.7 5.50 9,912.5 553.6 5.58 Certificates-$100,000 and Over....................... 2,065.4 103.6 5.02 1,930.0 105.5 5.47 1,560.4 91.7 5.88 Foreign Office Deposits.......... 877.1 45.6 5.20 232.4 12.7 5.46 401.7 22.2 5.53 Federal Funds Borrowed........... 3,424.7 172.1 5.03 2,314.4 121.7 5.26 1,535.9 85.5 5.57 Short-Term Bank Notes............ 643.2 33.1 5.15 461.8 26.0 5.63 658.1 36.9 5.61 Other Short-Term Borrowings...... 2,896.7 132.7 4.58 2,325.3 120.4 5.18 2,287.6 116.5 5.09 Long-Term Debt................... 2,322.8 136.3 5.87 2,495.0 139.5 5.59 2,114.9 128.5 6.08 - --------------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities...................... 30,762.3 1,333.4 4.33 28,363.0 1,316.0 4.64 27,082.6 1,304.1 4.82 - --------------------------------------------------------------------------------------------------------------------------------- Demand Deposits.................... 3,716.0 3,308.7 2,833.0 Other Liabilities.................. 1,312.1 951.4 677.7 - --------------------------------------------------------------------------------------------------------------------------------- Total Liabilities.................. 35,790.4 32,623.1 30,593.3 - --------------------------------------------------------------------------------------------------------------------------------- Shareholders' Equity............... 3,954.0 3,544.5 3,083.2 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $39,744.4 $36,167.6 $ 33,676.5 - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME MARGIN ON A TAXABLE EQUIVALENT BASIS....... $ 1,478.2 3.99% $ 1,331.1 3.93% $ 1,224.6 3.86% - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST RATE SPREAD........... 3.26% 3.18% 3.15% - --------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES TO INTEREST-EARNING ASSETS....... 83.06% 83.79% 85.31% - ---------------------------------------------------------------------------------------------------------------------------------
31 34 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
TABLE 2-ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS) - ----------------------------------------------------------------------------------------------------------------------------- 1999 COMPARED TO 1998 1998 Compared to 1997 -------------------------------------- ----------------------------------- ($ in millions) VOLUME YIELD/RATE MIX TOTAL Volume Yield/Rate Mix Total - ----------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Interest Income Loans and Leases .................... $ 155.2 $ (85.4) $ (7.0) $ 62.8 120.2 (16.9) (1.2) 102.1 Securities Taxable ........................... 84.6 4.4 .5 89.5 44.5 (24.5) (1.7) 18.3 Exempt from Income Taxes .......... 7.4 3.0 .5 10.9 10.3 (2.4) (.6) 7.3 Other Short-Term Investments ........ (1.4) 3.0 (.4) 1.2 (5.1) (5.3) 1.4 (9.0) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME CHANGE .......... 245.8 (75.0) (6.4) 164.4 169.9 (49.1) (2.1) 118.7 - ----------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Interest Expense Interest Checking ................... 10.2 (4.5) (.6) 5.1 10.0 (4.1) (.6) 5.3 Savings ............................. 4.0 (15.3) (.5) (11.8) 33.8 (1.5) (.5) 31.8 Money Market ........................ 1.3 (.3) -- 1.0 (33.1) 3.5 (1.1) (30.7) Other Time Deposits ................. (38.4) (39.1) 2.9 (74.6) (31.2) (7.9) .5 (38.6) Certificates-$100,000 and Over ...... 7.4 (8.7) (.6) (1.9) 21.7 (6.4) (1.5) 13.8 Foreign Office Deposits ............. 35.2 (.6) (1.7) 32.9 (9.4) (.3) .1 (9.6) Federal Funds Borrowed .............. 58.4 (5.4) (2.6) 50.4 43.4 (4.8) (2.4) 36.2 Short-Term Bank Notes ............... 10.2 (2.2) (.9) 7.1 (11.0) .1 -- (10.9) Other Short-Term Borrowings ......... 29.6 (13.9) (3.4) 12.3 1.9 2.1 -- 4.0 Long-Term Debt ...................... (9.6) 6.9 (.5) (3.2) 23.1 (10.4) (1.8) 10.9 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE CHANGE ......... 108.3 (83.1) (7.9) 17.3 49.2 (29.7) (7.3) 12.2 - ----------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS $ 137.5 $ 8.1 $ 1.5 147.1 120.7 (19.4) 5.2 106.5 - ----------------------------------------------------------------------------------------------------------------------------- INCREASE IN TAXABLE EQUIVALENT ADJUSTMENT ............... (12.4) (10.1) - ----------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME CHANGE ............ $ 134.7 96.4
RESULTS OF OPERATIONS SUMMARY Net income advanced by 22% in 1999 and 3% in 1998. The Bancorp's net income to average assets, referred to as return on average assets (ROA), and return on average shareholders' equity (ROE) follow: - -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Net income ($ in millions) $668.2 546.5 529.4 442.8 389.0 Earnings per share (a)...... $ 2.18 1.81 1.78 1.48 1.36 Diluted earnings per share (a)................. $ 2.15 1.78 1.75 1.45 1.32 ROA (b)..................... 1.89% 1.78 1.57 1.52 1.47 ROE (b)..................... 19.0% 18.2 17.2 16.3 15.9 Overhead ratio (b).......... 44.1% 45.3 46.8 48.3 50.1 Originally reported (c): ROA (b)................... 1.89% 1.93 1.96 1.78 1.78 ROE (b)................... 19.0% 18.7 19.6 17.8 18.1 Overhead ratio (b)........ 44.1% 42.3 41.0 43.5 43.9 - -------------------------------------------------------------------------------- (a) Per share amounts have been adjusted for the three-for-two stock splits effected in the form of stock dividends paid April 15, 1998, July 15, 1997 and January 12, 1996. (b) For comparability, certain financial ratios exclude the impact of 1999 merger-related items of $108.4 million pretax ($83.8 million after tax, or $.27 per share), 1998 merger-related items of $138 million pretax ($98.7 million after tax, or $.32 per share) and the impact of the 1996 special SAIF assessment of $49.6 million pretax ($31.3 million after tax, or $.11 per share). (c) Excludes the results of the CNB and Peoples poolings-of-interest prior to 1999 and Citfed Bancorp, Inc. and State Savings Company poolings-of-interest prior to 1998. NET INTEREST INCOME Net interest income is the difference between interest income on earning assets such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to be the Bancorp's largest revenue source. Net interest income is affected by the general level of interest rates, changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities. The relative performance of the lending and deposit-raising functions is frequently measured by two statistics - net interest margin and net interest rate spread. The net interest margin is determined by dividing fully-taxable equivalent net interest revenue by average earning assets. The net interest rate spread is the difference between the average fully-taxable equivalent yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net interest margin is generally greater than the net interest rate spread due to the additional income earned on those assets funded by non-interest-bearing liabilities, or free funding, such as demand deposits and shareholders' equity. Table 1 on page 31, Consolidated Average Balance Sheets and Analysis of Net Interest Income, presents the net interest income, net interest margin, and net interest rate spread for the three years 1997 through 1999, comparing interest revenue, average interest-bearing liabilities and average free funding outstanding. Each of these measures is reported on a fully-taxable equivalent basis. Nonaccrual loans and leases and loans held for sale have been included in the average loans and lease balances. Average outstanding securities balances are based upon amortized cost excluding any unrealized gains or losses on securities available for sale. Net interest income rose 11% to $1.5 billion in 1999 from $1.3 billion in 1998. The improvement in 1999's net interest income was attributable to a higher level of average interest-earning assets, improvement in the deposit mix, and the favorable repricing of interest-bearing liabilities. The net interest margin improved by 6 basis points (bps) to 3.99% in 1999 from 3.93% in 1998. The improvement in 1999 follows a similar 7 bps improvement in the net interest margin from 1998 to 1999. Lower rates in late 1998 and early 1999 continued to put downward pressure on lending rates, reducing the yield on interest-earning assets by 23 bps to 7.59% in 1999. The average yield on loans and leases was down by 38 bps, while the yield on taxable securities was up 4 bps. Continued strong growth in interest-bearing 32 35 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Investment advisory income ... $ 184.2 151.2 111.8 91.8 75.9 Service charges on deposits .. 174.2 155.8 132.3 115.4 92.5 Data processing income ....... 180.8 140.9 112.5 88.9 75.9 Other service charges and fees 337.8 293.3 225.3 188.7 154.0 - -------------------------------------------------------------------------------- Subtotal ..................... 877.0 741.2 581.9 484.8 398.3 - -------------------------------------------------------------------------------- Securities gains ............. .6 12.3 8.5 9.2 8.9 - -------------------------------------------------------------------------------- Total ........................ $ 877.6 753.5 590.4 494.0 407.2 - -------------------------------------------------------------------------------- After-tax securities gains ... $ .4 7.9 5.5 5.8 5.7 - -------------------------------------------------------------------------------- transaction deposits and lower short-term borrowing costs reduced the cost of interest-bearing liabilities by 31 bps in 1999, to 4.33% from 1998's 4.64%. The cost of borrowed funds, including foreign office deposits, federal funds borrowed, short-term bank notes, other short-term borrowings and long-term debt decreased by 26 bps in 1999, to 5.11%, from 5.37% in 1998. The positive contribution of free funding to the net interest margin was 73 bps in 1999 versus 75 bps in 1998. Average interest-earning assets increased by 9% to $37 billion in 1999, an increase of over $3.2 billion from 1998. During 1998, interest-earning assets grew by 7% over the prior year. The acquisition of Ashland Bankshares, Inc., Enterprise Federal Bancorp, Inc., Emerald Financial Corp. and CNB Bancshares Inc., in addition to strong growth in the residential mortgage lending business, led to the securitization of approximately $2.1 billion of residential mortgages during 1999. The Bancorp continues to use loan securitizations and sales to manage the composition of the balance sheet and to improve balance sheet liquidity. Securitizations and sales permit the Bancorp to grow the origination and servicing functions and to increase fee income without increasing capital leverage. Sales and securitizations of loans totaled approximately $4.7 billion in 1999 and $4.2 billion in 1998. Average interest-bearing liabilities grew to $30.7 billion during 1999, an increase of 8% over the $28.4 billion average in 1998. Core deposits (which excludes certificates of deposit with balances greater than $100,000 and foreign office deposits) remain the Bancorp's most important and lowest cost source of funding. OPERATING INCOME The table at the top of this page shows the components of other operating income for the five years ended December 31. Total other operating income, excluding securities gains, increased 18% in 1999 and was up 27% in 1998. There was strong growth across both traditional and non-banking business lines. Investment advisory income was $184.2 million in 1999, up from $151.2 million in 1998. Fifth Third is one of the largest money managers in the Midwest and as of December 31, 1999, had over $167 billion in assets under care, $22 billion in assets under management and $4.9 billion in its proprietary Fifth Third Funds. Strong sales of our Fifth Third Funds were attributable to recognition awards by Morningstar and The Wall Street Journal. The increase in investment advisory income was primarily - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Salaries, wages and incentives $ 425.3 382.2 335.1 309.5 266.3 Employee benefits ............ 79.8 72.1 67.3 72.0 62.3 Equipment expenses ........... 49.0 45.3 40.4 38.6 34.7 Net occupancy expenses ....... 72.9 66.9 63.4 60.6 51.5 Other operating expenses ..... 412.9 378.5 343.7 303.1 260.6 - -------------------------------------------------------------------------------- Total operating expenses ..... 1,039.9 945.0 849.9 783.8 675.4 - -------------------------------------------------------------------------------- Merger-related charges ....... 82.1 121.3 -- -- -- SAIF assessment .............. -- -- -- 49.6 -- - -------------------------------------------------------------------------------- Total ........................ $ 1,122.0 1,066.3 849.9 833.4 675.4 - --------------------------------------------------------------------------------
($ IN THOUSANDS) 1994 1995 1996 1997 1998 1999 OTHER OPERATING INCOME FIVE YEAR GROWTH RATE: 20% 345,635 407,160 494,024 590,428 753,544 877,686 OPERATING EARNINGS PER EMPLOYEES 325,746 389,017 474,135 529,379 645,212 752,029 OVERHEAD RATIO 52.5 50.1 48.3 46.8 45.3 44.1
*For comparability, certain financial ratios and statistics exclude the impact of the 1999 merger-related items of $108.4 million pretax ($83.8 million after-tax, or $.27 per share), 1998 merger-related items of $138 million pretax ($98.7 million after tax, or $.32 per share) and the 1996 special SAIF assessment of $49.6 million pretax ($31.3 million after tax, or $.11 per share). 33 36 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSI0N AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- attributed to strong growth in all product lines and the addition of several new annuities products. Corporate trust service fee income was up 30% and our personal trust fee income grew by 14%. Fifth Third Securities contributed a 31% increase in fee income as a result of successful new sales efforts, a new Internet-based securities workstation and the introduction of a Strategic Communications & Technology Unit Trust. Strength in equity markets and the acquisition of The Ohio Company led to 35% investment advisory income growth in 1998. Service charges on deposits reached $174.2 million in 1999, an increase of 12% over 1998's $155.8 million. Service charges on deposits increased 18% in 1998. The growth in both years was fueled by the expansion of delivery systems and successful sales campaigns promoting checking and savings accounts. Retail service charges on deposits increased 16% while commercial service charges increased 13% in 1999. Data processing income was up 28% in 1999 and up 25% in 1998 due to higher electronic transfer volume from debit and ATM card usage, expansion of business-to-business e-commerce and new sales. Merchant processing revenues, approximately 34% of total data processing revenues, increased 23% this year and 24% in 1998 due to new customers and resulting increases in merchant transaction volumes. Electronic funds transfer, the other portion of data processing income, grew by 38% this year and 27% in 1998 fueled by higher debit and ATM card usage. MPS ranks #1 and #6 in the nation, respectively, in EFT and merchant processing, handling over 3.7 billion electronic transactions in 1999. MPS' world-class capabilities as a transaction processor position us well to take advantage of the opportunities of e-commerce. Other service charges and fees climbed to $337.8 million in 1999, an increase of 15% over 1998. Mortgage banking revenue, commercial banking income, cardholder fees and consumer loan and lease fees represent the majority of other service charges and fees. Mortgage banking revenue was $97.2 million in 1999, a 1% increase over 1998. Residential mortgage loan originations declined to $4.8 billion in 1999, or 22% from 1998 primarily due to changes in the interest rate environment and rationalization of certain out-of-market portions of the mortgage businesses acquired in the CitFed and State Savings acquisitions in 1998. Gains on sales of residential mortgages increased 23% over 1998. Sales and securitizations of residential mortgage loans were $4.7 billion in 1999, up from $4.2 billion in 1998. Fifth Third's total residential mortgage loan servicing portfolio was $16.6 billion at year-end 1999, with $11.4 billion of loans serviced for other investors, compared to $16.7 billion with $11.8 billion serviced for others at the end of 1998. Outstanding sales efforts in our affiliates resulted in commercial banking revenue growth of 44% to $63.1 million in 1999, led by international department revenue which included foreign currency exchange, letters of credit and trade financing. The information technology products offered by our Corporate Treasury Management, several sizable lockbox processing relationships and credit enhancement fees also contributed to this year's growth. Cardholder fees from our credit card portfolio provided $33.8 million, up 9% and consumer loan and lease fees contributed $43 million, up 23% on strong origination activity. Commercial banking income of $43.9 million in 1998 represented an increase of 46% over 1997 and resulted primarily from International department revenue and credit enhancement fee growth. Mortgage-banking revenue increased 52% to $95.9 million on strong origination and secondary marketing activity during 1998. Consumer loan and lease fees increased 19% to $34.9 million, 1998 over 1997. Other service charges and fees were $293.3 million in 1998, compared to $225.3 million in 1997, an increase of 30%. OPERATING EXPENSES The Bancorp continues to lead the banking industry in driving its overhead ratio to record levels by consistently generating revenue at a rate faster than expenses. The Bancorp's success in controlling operating expenses comes from efficient staffing, a constant focus on process improvement and centralization of various internal functions such as data processing, loan servicing and corporate overhead functions. Operating expense levels are often measured using an overhead ratio (operating expenses divided by the sum of taxable equivalent net interest income and other operating income). As the chart on page 33 illustrates, the Bancorp's ratio has remained well below our peers, at 44% for 1999 and 45% in 1998 and under 50% since 1996. Total operating expenses increased 10% in 1999 and 11% in 1998, excluding merger-related charges of $82.1 million and $121.3 million, respectively. Salaries, wages and incentives comprised 41% and 40% of total operating expenses, excluding merger-related charges, in 1999 and 1998, respectively. Compensation increased 11% in 1999 and 14% in 1998 as a result of more variable compensation for increased sales production, higher staffing costs related to computer programming, a tighter labor market, acquisitions and additional personnel to support sales and our volume-related business. The Bancorp's productivity ratios, which measure the degree of efficiency of our employees, have shown improvement since 1994. Operating earnings per employee were $64.3 thousand for 1999, compared to $33.9 thousand in 1994, an increase of 89% as the chart on page 33 illustrates. LOAN AND LEASE PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------- ------------------- ------------------ ----------------- ------------------ ($ in millions) AMOUNT % Amount % Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------------------------------- Commercial: Commercial.......... $ 6,288.0 24.9% $ 5,827.5 25.4% $ 5,718.4 25.7% $ 5,351.6 26.4% $ 4,700.4 25.0% Mortgage ........... 2,651.4 10.5 1,887.9 8.2 1,778.2 8.0 1,697.9 8.4 1,618.6 8.6 Construction ....... 1,067.9 4.2 826.3 3.6 723.4 3.3 707.7 3.4 623.2 3.3 Leases ............. 1,843.4 7.3 1,463.4 6.4 1,207.0 5.4 928.4 4.6 703.9 3.7 - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal 11,850.7 46.9 10,005.1 43.6 9,427.0 42.4 8,685.6 42.8 7,646.1 40.6 - ----------------------------------------------------------------------------------------------------------------------------------- Consumer: Installment ........ 4,987.3 19.7 4,179.4 18.2 3,681.3 16.6 3,311.4 16.3 3,674.4 19.5 Mortgage ........... 4,967.3 19.7 6,201.4 27.0 6,848.9 30.8 6,119.8 30.2 5,801.2 30.8 Credit Card ........ 318.0 1.3 344.7 1.5 369.8 1.7 436.3 2.1 393.9 2.1 Leases ............. 3,137.4 12.4 2,214.8 9.7 1,887.0 8.5 1,748.0 8.6 1,298.0 7.0 - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal 13,410.0 53.1 12,940.3 56.4 12,787.0 57.6 11,615.5 57.2 11,167.5 59.4 - ----------------------------------------------------------------------------------------------------------------------------------- Total ................ $25,260.7 100.0% $22,945.4 100.0% $22,214.0 100.0% $20,301.1 100.0% $18,813.6 100.0% - -----------------------------------------------------------------------------------------------------------------------------------
34 37 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Employee benefits expense increased 11% in 1999 resulting from a higher employee base. Full-time-equivalent (FTE) employees were 11,692 at December 31, 1999, a 3% increase over 1998's 11,354. FTEs at December 31, 1997 were 11,246. The addition of ATMs and software and processing technology upgrades led to an increase of 8% and 12% in equipment expense in 1999 and 1998, respectively. Net occupancy expenses increased 9% in 1999 and 5% in 1998. Contributing to net occupancy expense growth was the utilization of additional office rental space to support growth and repairs and maintenance expense to the existing branch network. Volume-related expenses of our processing and fee businesses, along with higher loan and lease processing costs from strong origination volumes, principally contributed to the increase in 1999 and 1998 other operating expenses. Other operating expenses increased to $412.9 million in 1999, up $34.4 million or 9% over 1998 and increased $34.8 million or 10% in 1998 over 1997. Loan and lease and bankcard expense increased $16.6 million or 23% in 1999 and $17.3 million or 32% in 1998. Marketing and communications expense increased $7.8 million to $71.4 million in 1999 and $3.9 million in 1998, primarily due to the continued promotion of the Bancorp's diversified loan, investment and deposit products. Operating expenses for 1999 and 1998 include merger-related pretax charges of $82.1 million and $121.3 million, respectively. For 1999, the merger charge relates directly to the acquisitions of CNB Bancshares and Peoples Bank Corporation of Indianapolis. For 1998, the merger charge relates to the acquisitions of CitFed and State Savings and CNB's acquisition of Pinnacle Financial Services, Inc. These charges consist primarily of employee benefit obligations, costs to eliminate duplicate facilities and equipment, contract terminations, conversion expenses and professional fees. See Note 18 of the Notes to Consolidated Financial Statements for additional discussion. FINANCIAL CONDITION LOANS AND LEASES The table on page 34 shows the history of commercial and consumer loans and leases by major category at December 31. On-balance-sheet loan and leases increased 10% and 3%, respectively, in 1999 and 1998. In both years, the growth in outstandings was affected considerably by sales and securitizations of residential and commercial loans, which allows the Bancorp to be selective in how much of the expanding origination volume is retained in the loan and lease portfolio. Although residential mortgage loan originations were $4.8 billion for 1999, the related loans decreased 20% because $4.7 billion of the respective origination volume was sold or securitized. Installment loan balances grew 19% during 1999 and 14% during 1998; as a result of successful direct installment loan sales in the Bancorp's Banking Centers. Consumer leases grew 42% during 1999 and 17% in 1998, and represent 12% and 10% of total loans and leases at December 31, 1999 and 1998, respectively. Commercial loan and lease outstandings were up 12% in 1999 and 5% in 1998. Commercial leasing contributed to increases of 26% and 21%, respectively, consisting largely of improvements within our market areas of Ohio, Kentucky, Indiana, Florida, Michigan, Illinois and Arizona. Commercial mortgages represent 11% of our total loan and lease portfolio and primarily include financing of owner-occupied properties--loans on properties occupied by the principal borrower. To maintain balance sheet flexibility and to serve as a source of fee income, the Bancorp, during 1999 and 1998 sold, with servicing retained, certain floating-rate commercial loans to a commercial paper funding corporation. The outstanding balances of these loans were $1.4 billion and $1.1 billion at December 31, 1999 and 1998, respectively. In addition to the loan and lease portfolio, the Bancorp serviced loans for others of approximately $15.4 billion, $14.3 billion and $11.1 billion at December 31, 1999, 1998 and 1997, respectively. UNDERPERFORMING ASSETS Underperforming assets consist of (1) nonaccrual loans and leases on which the ultimate collectibility of the full amount of interest is uncertain, (2) loans and leases which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, (3) loans and leases past due 90 days or more as to principal or interest and (4) other real estate owned. A summary of underperforming assets at December 31 follows: - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 - -------------------------------------------------------------------------------- Nonaccrual loans and leases .................... $ 66.8 77.1 102.1 Renegotiated loans and leases -- 1.2 1.8 Other real estate owned ..... 10.5 12.6 13.8 - -------------------------------------------------------------------------------- Total nonperforming assets .. 77.3 90.9 117.7 Ninety days past due loans and leases ................ 68.2 87.0 55.7 - -------------------------------------------------------------------------------- Total underperforming assets $ 145.5 177.9 173.4 - -------------------------------------------------------------------------------- Nonperforming assets as a percent of total loans, leases and other real estate owned ............. .31% .41 .54 Underperforming assets as a percent of total loans, leases and other real estate owned ............ .58% .80 .79 - -------------------------------------------------------------------------------- RESERVE FOR CREDIT LOSSES FIVE YEAR HISTORY
- ------------------------------------------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Balance at January 1 ............ $ 331.6 312.2 284.3 271.0 245.9 Provision for credit losses ..... 134.0 123.5 116.9 82.9 54.8 Losses charged off .............. ( 154.3) ( 142.8) ( 121.7) ( 103.6) ( 58.0) Recoveries of losses previously charged off .................. 42.5 33.0 30.5 26.3 17.2 Reserve of acquired institutions and other .................... 12.8 5.7 2.2 7.7 11.1 - ------------------------------------------------------------------------------------------------------------------- Balance at December 31 .......... $ 366.6 331.6 312.2 284.3 271.0 - ------------------------------------------------------------------------------------------------------------------- Loans and leases outstanding at December 31 .................. $ 24,963.6 $ 22,356.5 $ 21,898.9 $ 20,207.8 $ 18,422.7 Reserve as a percent of loans and leases outstanding ............ 1.47% 1.48% 1.43% 1.41% 1.47% Average loans and leases (a) .... $ 23,840.4 $ 22,188.2 $ 20,972.4 $ 19,485.7 $ 17,524.2 Net charge-offs as a percent of average loans and leases outstanding ............ .36% .47% .43% .40% .23% Reserve as a percent of total nonperforming assets .......... 474.06% 364.44% 265.41% 228.08% 206.69% Reserve as a percent of total underperforming assets ........ 251.86% 186.31% 180.05% 164.61% 172.61% - -------------------------------------------------------------------------------------------------------------------
(a) Average loans and leases exclude loans held for sale. 35 38 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Nonperforming assets as a percentage of total loans, leases and other real estate owned was .31% at December 31, 1999, a decrease from .41% at December 31, 1998. At December 31, 1999, 1998 and 1997, nonaccrual loans and leases included residential mortgage loans of $18.6 million, $22.6 million and $35.4 million, respectively, and commercial loans and leases of $39.1 million, $36.9 million and $49.6 million, respectively. A decline in residential mortgage loans was the primary reason for the decrease in nonaccrual loans and leases during 1999. At December 31, 1999, 1998, and 1997, loans and leases 90 days past due included residential mortgage loans of $35.9 million, $37.3 million and $17.5 million, respectively, installment loans and consumer leases of $9.0 million, $26.2 million and $17.6 million, respectively, and commercial loans and leases of $18.4 million, $16.6 million and $15.2 million, respectively. At December 31, 1999, 1998 and 1997, credit card receivables of $4.9 million, $6.9 million and $5.4 million, respectively, were 90 days past due. A decrease in residential mortgage loans was the primary reason for the decrease in loans and leases 90 days past due. Of the total underperforming assets at December 31, 1999, $42.6 million are to borrowers or projects in the Cincinnati-Dayton market area, $49.5 million in the Indiana market area, $21.6 million in the Columbus market area, $6.1 million in the Louisville market area, $7.7 million in the Cleveland market area, $10.5 million distributed in the market areas of our smaller affiliate banks and $7.5 million outside of the Ohio-Kentucky-Indiana area. SECURITIES The investment portfolio shown below consists largely of fixed and floating-rate mortgage-related securities, predominantly underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying mortgages. The estimated average life of the portfolio is 5.2 years based on current prepayment expectations. The Bancorp securitized $2.1 billion of fixed and adjustable-rate residential mortgages in 1999 and $1.6 billion in 1998.
SECURITIES PORTFOLIO AT DECEMBER 31 - ------------------------------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury ............................ $ 113.9 255.9 257.8 301.7 339.4 - ------------------------------------------------------------------------------------------------------- U.S. Government agencies and corporations ........................... 526.6 54.6 659.2 538.5 530.5 - ------------------------------------------------------------------------------------------------------- States and political subdivisions ........ 699.6 703.9 352.0 410.6 409.3 - ------------------------------------------------------------------------------------------------------- Agency mortgage-backed securities ........ 9,786.8 9,002.0 7,979.6 7,072.2 4,538.8 - ------------------------------------------------------------------------------------------------------- Other bonds, notes and debentures ........ 1,356.8 788.5 621.7 931.3 901.8 - ------------------------------------------------------------------------------------------------------- Other securities ......................... 203.8 379.0 344.7 202.5 150.5 - ------------------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury ........................... -- -- -- 3.0 3.0 - ------------------------------------------------------------------------------------------------------- U.S. Government agencies and corporations -- -- -- 189.1 153.0 States and political subdivisions ....... 117.1 86.0 179.5 290.6 246.8 - ------------------------------------------------------------------------------------------------------- Agency mortgage-backed securities ....... -- -- 98.4 121.4 134.9 - ------------------------------------------------------------------------------------------------------- Other bonds, notes and debentures ....... 1.5 1.7 1.5 1.8 1.5 Other securities ........................ 10.5 34.2 36.5 82.9 66.7 - -------------------------------------------------------------------------------------------------------
MATURITIES OF SECURITIES AT DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------- MATURITY 1-5 YEAR 6-10 YEAR UNDER 1 YEAR MATURITY MATURITY ----------------- --------------------- --------------------- ($ in millions) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD - ---------------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury ............ $ 70.1 5.83% $ 41.4 4.66% $ 2.0 6.75% - ---------------------------------------------------------------------------------------------------------------- U.S. Government agencies and corporations ...... 7.0 6.31 17.6 6.05 496.2 7.11 - ---------------------------------------------------------------------------------------------------------------- States and political subdivisions (a) ....... 29.4 8.78 154.9 8.20 193.2 7.74 - ---------------------------------------------------------------------------------------------------------------- Agency mortgage- backed securities (b) .. 365.7 6.64 6,896.0 6.70 1,447.4 6.70 - ---------------------------------------------------------------------------------------------------------------- Other bonds, notes and debentures (c) ......... 25.5 6.47 700.7 6.60 348.9 6.96 - ---------------------------------------------------------------------------------------------------------------- Securities Held to Maturity: States and political subdivisions (a) ...... 50.7 4.62 19.0 5.16 3.8 5.40 - ---------------------------------------------------------------------------------------------------------------- Other bonds, notes and debentures ............. 0.2 6.75 1.0 7.52 0.3 6.53 - ----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------ OVER 10 YEAR MATURITY TOTAL ----------------------- -------------------- ($ in millions) AMOUNT YIELD AMOUNT YIELD - ------------------------------------------------------------------------------------ Securities Available for Sale: U.S. Treasury ............ 0.4 8.63% $ 113.9 5.43% - ------------------------------------------------------------------------------------ U.S. Government agencies and corporations ...... 5.8 6.66 526.6 7.06 - ------------------------------------------------------------------------------------ States and political subdivisions (a) ....... 322.1 6.90 699.6 7.50 - ------------------------------------------------------------------------------------ Agency mortgage- backed securities (b) .. 1,077.7 6.86 9,786.8 6.72 - ------------------------------------------------------------------------------------ Other bonds, notes and debentures (c) ......... 281.7 6.94 1,356.8 6.76 - ------------------------------------------------------------------------------------ Securities Held to Maturity: States and political subdivisions (a) ...... 43.6 5.99 117.1 5.24 - ------------------------------------------------------------------------------------ Other bonds, notes and debentures ............. -- -- 1.5 7.21 - ------------------------------------------------------------------------------------
Maturities of mortgage-backed securities were estimated based on historical and predicted prepayment trends. (a) taxable-equivalent yield using the statutory rate in effect. (b) included in agency mortgage-backed securities available for sale are floating-rate securities totaling $1.4 billion. (c) included in other bonds, notes and debentures available for sale are floating-rate securities totaling $.7 million. 36 39 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- These securitizations improve liquidity, reduce interest rate risk and the reserve for credit losses and preserve capital. Further securitizations in 2000 are expected. PROVISION AND RESERVE FOR CREDIT LOSSES The Bancorp provides as an expense an amount for expected credit losses which is based on the growth of the loan and lease portfolio and on recent loss experience. The expected credit loss expense is included in the Consolidated Statements of Income in the caption Provision for Credit Losses. Actual losses on loans and leases are charged against the Reserve for Credit Losses on the Consolidated Balance Sheets through the provision for credit losses. The amount of loans and leases actually removed as assets from the Consolidated Balance Sheets is referred to as charge-offs and, after netting out recoveries on previously charged off assets, becomes net charge-offs. Net charge-offs increased $2 million over 1998 due to higher losses on commercial loans and leases. Net charge-offs as a percent of average loans and leases outstanding were .36%, .47% and .43% for 1999, 1998 and 1997, respectively. Although this percentage declined in 1999, the net charge-off ratio remains near the Bancorp's historical 10-year average of .50%. The reserve for credit losses as a percentage of total loans and leases was 1.47% and 1.48% at December 31, 1999 and 1998, respectively. The table on page 35 presents credit loss data for the most recent five year period. DEPOSITS Interest-earning assets are funded primarily by core deposits. The accompanying tables show the relative composition of the Bancorp's average deposits and the change in average deposit sources during the last five years. Other time deposits are comprised of consumer certificates of deposit. Foreign office deposits are denominated in amounts greater than $100,000. The Bancorp's continued focus on Banking Center sales campaigns for transaction accounts throughout 1999 sustained strong growth in core deposits. Average demand, interest checking and saving balances rose 9% in 1999 and 22% in 1998. Our MaxSaver product contributed to the growth in savings balances, while the Platinum One and Business 53 products and other promotional campaigns drove the increase in demand and interest checking. In 1998, the Bancorp acquired deposits of $116.6 million from Bank One Corporation in 1998. During 1997, the Bancorp acquired deposits of $128.9 million from Great Lakes National Bank Ohio and $126.1 million of deposits through the acquisition of Suburban Bancorporation, Inc. DISTRIBUTION OF AVERAGE DEPOSITS - -------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Demand .......... 14.8% 13.7 12.2 11.3 11.7 Interest checking 15.1 13.9 12.5 11.6 11.7 Savings ......... 16.7 16.9 13.0 12.0 8.8 Money market .... 7.4 7.6 11.4 13.0 14.5 Other time ...... 34.3 38.9 42.5 43.4 43.4 Certificates- $ 100,000 and over ...... 8.2 8.0 6.7 6.4 5.8 Foreign office .. 3.5 1.0 1.7 2.3 4.1 - -------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100% - -------------------------------------------------------------------------------- CHANGE IN AVERAGE DEPOSIT SOURCES
- ------------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------- Demand .......... $ 407.3 475.7 293.4 316.5 270.9 Interest checking 465.7 426.0 322.6 367.6 ( 137.3) Savings ......... 128.7 1,058.8 326.7 1,017.5 ( 329.8) Money market .... 31.2 ( 845.4) (248.5) 167.6 375.3 Other time ...... ( 697.3) ( 559.3) 172.1 1,499.6 1,067.0 Certificates- $100,000 and over ...... 135.4 369.6 115.8 336.7 479.3 Foreign office .. 644.7 ( 169.3) (120.5) ( 258.3) 251.0 - ------------------------------------------------------------------------------------- Total change .... $ 1,115.7 756.1 861.6 3,447.2 1,976.4 - -------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS Short-term borrowings consist primarily of short-term excess funds from correspondent banks, securities sold under agreements to repurchase, short-term bank notes and commercial paper issuances. Short-term borrowings primarily fund short-term, rate-sensitive earning-asset growth. Average short-term borrowings as a percentage of average earning-assets increased from 15% in 1998 to 19% in 1999. Although the Bancorp was successful in attracting transaction accounts in both 1999 and 1998, the overall funding mix shifted with short-term borrowings supporting a relatively higher proportion of earning-assets. During 1999 and 1998, the Bancorp increased its reliance on short-term borrowings as loan and lease growth outpaced core deposit growth. As the following table of average short-term borrowings and average Federal funds loaned indicates, the Bancorp was a net borrower of $6.8 billion in 1999, up from $4.9 billion in 1998. AVERAGE SHORT-TERM BORROWINGS - -------------------------------------------------------------------------------- ($ in millions) 1999 1998 1997 1996 1995 - -------------------------------------------------------------------------------- Federal funds borrowed ........... $3,424.7 2,314.4 1,535.9 1,295.1 1,108.9 - -------------------------------------------------------------------------------- Short-term bank notes.......... 643.2 461.8 658.1 553.9 769.0 Other short-term borrowings.......... 2,896.7 2,325.3 2,287.6 1,728.2 1,380.2 - -------------------------------------------------------------------------------- Total short-term borrowings.......... 6,964.6 5,101.5 4,481.6 3,577.2 3,258.1 Federal funds loaned.............. 130.6 140.8 183.7 170.7 193.6 Net funds borrowed.......... $6,834.0 4,960.7 4,297.9 3,406.5 3,064.5 - -------------------------------------------------------------------------------- 37 40 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- CAPITAL RESOURCES The Bancorp maintains a relatively high level of capital as a margin of safety for its depositors and shareholders. At December 31, 1999, shareholders' equity was $4.1 billion compared to $3.8 billion at December 31, 1998, an increase of $282 million, or 7%. The following table shows several capital and liquidity ratios for the last three years: - --------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------- Average shareholders' equity to Average assets................... 9.95% 9.80 9.16 Average deposits................. 15.69% 14.72 13.22 Average loans and leases......... 16.22% 15.72 14.59 - ---------------------------------------------------------------- LIQUIDITY AND MARKET RISK The objective of the Bancorp's Asset/Liability management function is to maintain consistent growth in net interest income within the Bancorp's policy limits. This objective is accomplished through management of the Bancorp's balance sheet composition, liquidity, and interest rate risk exposures arising from changing economic conditions, interest rates and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or unexpected deposit withdrawals. This is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity in the national money markets and delivering consistent growth in core deposits. As of December 31, 1999, the Bancorp had approximately $3 billion in securities and other short-term investments maturing or repricing within one year. Additional asset-driven liquidity is provided by the remainder of the securities portfolio and securitizable loan and lease assets. These sources, in addition to the Bancorp's 10% average equity capital base, provide a stable funding base. In addition to core deposit funding, the Bancorp also accesses a variety of other short-term and long-term funding sources. The Bancorp also uses the Federal Home Loan Bank (FHLB)as a funding source, issuing notes payable through its FHLB member subsidiaries. The Bancorp also has significant unused funding capacity in the national money markets. The Bancorp's A1+/P-1 ratings on its commercial paper, along with an AA-/Aa2 ratings for long-term deposits at Fifth Third Bank, its lead bank, continue to be among the best in the industry. Seven of the Bancorp's other subsidiaries, Fifth Third Bank, Northwestern Ohio, N.A.; Fifth Third Bank, Central Ohio; Fifth Third Bank, Western Ohio; Fifth Third Bank, Indiana; Fifth Third Bank, Northern Kentucky, Inc.; Fifth Third Bank, Kentucky, Inc.; and Civitas Bank maintain current deposit ratings of A1+/P1 and AA-/Aa3 on their short-term and long-term deposits, respectively. These ratings, along with capital ratios significantly above the current regulatory guidelines, provide the Bancorp with additional liquidity. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs. Management considers interest rate risk the Bancorp's most significant market risk. Interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates. Consistency of the Bancorp's net interest revenue is largely dependent upon the effective management of interest rate risk. The Bancorp employs a variety of measurement techniques to identify and manage its interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates. The model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes senior management projections for activity levels in each of the product lines offered by the Bancorp. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain, and as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. The Bancorp's Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk within Board-approved policy limits. The Bancorp's current interest rate risk policy limits are determined by measuring the anticipated change in net interest income over a 12 and 24 month horizon assuming a 200 basis point immediate and sustained increase or decrease in all interest rates. Current policy limits this exposure to plus or minus 5% of net interest income for a 12 month horizon and plus or minus 9% of net interest income over a 24 month horizon. The following table shows the Bancorp's estimated earnings sensitivity profile as of December 31, 1999: - -------------------------------------------------------------------------------- CHANGE IN PERCENTAGE CHANGE IN INTEREST RATES NET INTEREST INCOME (BASIS POINTS) 12 MONTHS 24 MONTHS - -------------------------------------------------------------------------------- +200 (4.9)% 1.3% -200 1.3% (7.7)% - -------------------------------------------------------------------------------- Given an immediate and sustained 200 basis point increase in the yield curve used in the simulation model, it is estimated net interest income for the Bancorp would decrease by 5% over one year and increase by 1% over two years. A 200 basis point immediate and sustained decrease in interest rates would increase net interest income by 1% over one year and would decrease net interest income by an estimated 8% over two years. All of these estimated changes in net interest income are within the policy guidelines established by the Board of Directors. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets. All long-term, fixed-rate single family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation or Federal National Mortgage Association guidelines are sold for cash upon origination. Periodically, additional assets such as adjustable-rate residential mortgages and certain short-term commercial loans are also securitized or sold. In 1999 and 1998, $4.7 billion and $4.2 billion, respectively, of fixed and adjustable-rate residential mortgages were securitized or sold. In addition in 1999 and 1998, certain primarily fixed-rate, short-term commercial loans were sold to a commercial paper funding conduit. Management focuses its efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines. The Bancorp does not currently engage in trading activities. 38 41 FIFTH THIRD BANCORP AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
CONSOLIDATED SIX YEAR SUMMARY OF OPERATIONS - ---------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31 ($ in millions) 1999 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Interest Income ..................... $ 2,738.1 2,585.8 2,477.6 2,272.0 1,949.9 1,544.4 Interest Expense .................... 1,333.5 1,315.9 1,304.1 1,189.3 1,045.4 720.3 - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income ................. 1,404.6 1,269.9 1,173.5 1,082.7 904.5 824.1 Provision for Credit Losses ......... 134.0 123.5 116.9 82.9 54.8 49.3 - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income After Provision for Credit Losses ................ 1,270.6 1,146.4 1,056.6 999.8 849.7 774.8 Other Operating Income .............. 877.6 753.5 590.4 494.0 407.2 345.6 Operating Expenses .................. 1,039.9 945.0 849.9 783.8 675.4 630.0 SAIF Assessment ..................... -- -- -- 49.6 -- -- Merger-Related Charges .............. 82.1 121.3 -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes .......... 1,026.2 833.6 797.1 660.4 581.5 490.4 Applicable Income Taxes ............. 358.0 287.1 267.7 217.6 192.5 164.7 - ---------------------------------------------------------------------------------------------------------------------------- Net Income .......................... $ 668.2 546.5 529.4 442.8 389.0 325.7 - ---------------------------------------------------------------------------------------------------------------------------- Earnings Per Share (a) .............. $ 2.18 1.81 1.78 1.48 1.36 1.16 Diluted Earnings Per Share (a) ...... $ 2.15 1.78 1.75 1.45 1.32 1.12 - ---------------------------------------------------------------------------------------------------------------------------- Cash Dividends Declared Per Share (a) $ .88 .71 .56% .48% .42% .35% - ----------------------------------------------------------------------------------------------------------------------------
(a) Per share amounts have been adjusted for the three-for-two stock splits effected in the form of stock dividends paid April 15, 1998, July 15, 1997 and January 12, 1996.
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION - ---------------------------------------------------------------------------------------------------------- As of December 31 ($ in millions) 1999 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------- Securities ................... $ 12,816.6 11,305.8 10,530.9 10,145.6 7,476.2 6.466.8 Loans and Leases ............. 24,963.6 22,356.5 21,898.9 20,207.8 18,422.7 16,389.1 Loans Held for Sale .......... 297.1 588.9 315.1 93.3 390.9 55.5 Assets ....................... 41,589.5 37,092.3 35,180.2 33,135.1 28,302.0 24,798.5 Deposits ..................... 26,083.1 24,495.8 24,289.6 23,306.0 20,825.6 18,063.5 Short-Term Borrowings ........ 8,373.7 4,514.6 4,391.3 4,263.3 2,474.0 3,174.6 Long-Term Debt and Convertible Subordinated Notes ........ 1,976.3 3,236.1 2,305.3 1,795.1 1,781.7 969.8 Shareholders' Equity ......... 4,077.0 3,795.1 3,358.5 3,135.4 2,658.6 2,179.7 - -----------------------------------------------------------------------------------------------------------
SUMMARIZED QUARTERLY FINANCIAL INFORMATION - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 -------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST (Unaudited)($ in millions) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER - ---------------------------------------------------------------------------------------------------------------------------- Interest Income ............. $725.9 702.9 668.6 640.7 641.7 646.2 652.6 645.3 Net Interest Income ......... 355.9 357.3 352.3 339.1 329.0 320.0 314.1 306.8 Provision for Credit Losses.. 43.7 29.6 35.3 25.4 30.1 17.1 47.1 29.2 Income Before Income Taxes... 195.1 293.2 272.0 265.9 267.4 261.0 89.0 216.2 Net Income .................. 116.3 195.4 180.2 176.3 177.8 171.1 53.3 144.3 Earnings Per Share .......... .37 .64 .59 .58 .59 .56 .18 .48 Diluted Earnings Per Share... .37 .63 .58 .57 .57 .56 .18 .47 - ---------------------------------------------------------------------------------------------------------------------------
39 42 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED TEN YEAR COMPARISON
AVERAGE ASSETS ($ IN MILLIONS) - --------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS ---------------------------------------------------------------- FEDERAL INTEREST-BEARING CASH AND TOTAL LOANS AND FUNDS DEPOSITS DUE FROM OTHER AVERAGE YEAR LEASES LOANED (a) IN BANKS (a) SECURITIES TOTAL BANKS ASSETS ASSETS - --------------------------------------------------------------------------------------------------------------------------- 1999 $24,382.6 $130.6 $ 90.7 $12,434.0 $37,037.9 $953.3 $2,108.4 $39,744.4 1998 22,542.6 140.8 114.9 11,052.4 33,850.7 884.2 1,752.6 36,167.6 1997 21,129.8 183.7 162.5 10,269.7 31,745.7 727.9 1,495.2 33,676.5 1996 19,632.7 170.7 162.9 9,469.3 29,435.6 744.7 1,380.7 31,280.5 1995 17,641.4 193.6 87.8 7,103.7 25,026.5 767.4 949.4 26,485.5 1994 15,466.7 211.3 97.4 5,843.2 21,618.6 747.3 798.5 22,925.6 1993 13,974.2 175.7 178.4 5,002.5 19,330.8 709.0 783.1 20,609.7 1992 12,028.6 331.0 186.7 4,974.7 17,521.0 630.3 789.8 18,770.7 1991 11,128.9 502.1 223.0 4,562.3 16,416.3 574.5 739.9 17,582.8 1990 10,713.7 573.0 184.2 3,987.7 15,458.6 588.3 771.8 16,683.6 - ---------------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS) - --------------------------------------------------------------------------------------------------------------------------- DEPOSITS ------------------------------------------------------------------------------------------ CERTIFICATES- SHORT- INTEREST MONEY OTHER $100,000 FOREIGN TERM YEAR DEMAND CHECKING SAVINGS MARKET TIME AND OVER OFFICE TOTAL BORROWINGS TOTAL - --------------------------------------------------------------------------------------------------------------------------- 1999 $3,716.0 $3,813.1 $4,210.8 $1,852.6 $8,655.9 $2,065.4 $877.1 $25,190.9 $6,964.6 $32,155.5 1998 3,308.7 3,347.4 4,082.1 1,821.4 9,353.2 1,930.0 232.4 24,075.2 5,101.5 29,176.7 1997 2,833.0 2,921.4 3,023.3 2,666.8 9,912.5 1,560.4 401.7 23,319.1 4,481.6 27,800.7 1996 2,539.6 2,598.8 2,696.6 2,915.3 9,740.4 1,444.6 522.2 22,457.5 3,577.2 26,034.7 1995 2,223.1 2,231.2 1,679.1 2,747.7 8,240.8 1,107.9 780.5 19,010.3 3,258.1 22,268.4 1994 1,952.2 2,368.5 2,008.9 2,372.4 7,173.9 628.6 529.4 17,033.9 2,519.2 19,553.1 1993 1,801.0 2,118.2 2,038.3 2,243.3 6,616.2 710.4 242.3 15,769.7 1,611.5 17,381.2 1992 1,532.7 1,809.6 1,702.0 2,214.2 6,598.2 753.8 48.2 14,658.7 1,397.7 16,056.4 1991 1,288.2 1,398.9 1,523.3 1,970.3 6,694.7 1,196.1 13.1 14,084.6 1,065.1 15,149.7 1990 1,189.5 1,241.7 1,355.8 1,858.6 6,561.9 1,327.3 2.3 13,537.1 847.5 14,384.6
INCOME ($ IN MILLIONS, EXCEPT PER SHARE) - --------------------------------------------------------------------------------------------------------------------------- PER SHARE (b) ------------------------------------------------------ ORIGINALLY REPORTED ------------------------------- OTHER DIVIDEND INTEREST INTEREST OPERATING OPERATING NET DILUTED DIVIDENDS DILUTED PAYOUT YEAR INCOME EXPENSE INCOME EXPENSE INCOME EARNINGS EARNINGS DECLARED EARNINGS EARNINGS RATIO - --------------------------------------------------------------------------------------------------------------------------- 1999 $2,738.1 $1,333.5 $877.6 $1,122.0 $668.2 $2.18 $2.15 $.88 $2.18 $2.15 40.9% 1998 2,585.8 1,315.9 753.5 1,066.3 546.5 1.81 1.78 .71 1.80 1.76 40.3 1997 2,477.6 1,304.1 590.4 849.9 529.4 1.78 1.75 .568/9 1.73 1.69 33.6 1996 2,272.0 1,189.3 494.0 833.4 442.8 1.48 1.45 .488/9 1.43 1.40 34.9 1995 1,949.9 1,045.4 407.2 675.4 389.0 1.36 1.32 .422/3 1.29 1.26 33.8 1994 1,544.4 720.3 345.6 630.0 325.7 1.16 1.12 .355/9 1.13 1.10 32.3 1993 1,408.3 634.1 325.7 594.9 299.8 1.10 1.06 .302/9 .97 .95 31.8 1992 1,412.9 700.6 286.6 538.0 239.8 .90 .89 .262/3 .81 .81 33.0 1991 1,529.7 917.4 254.6 492.2 190.0 .71 .71 .231/9 .69 .69 33.5 1990 1,555.1 1,024.8 171.8 444.3 123.2 .48 .48 .201/7 .61 .61 33.0 - ---------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT SHARE INFORMATION) - ----------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------ ACCUMULATED NUMBER OF NONOWNER RESERVE SHARES OF STOCK COMMON CAPITAL RETAINED CHANGES IN TREASURY PER FOR CREDIT YEAR OUTSTANDING (b) STOCK SURPLUS EARNINGS EQUITY STOCK TOTAL SHARE (b) LOSSES - ------------------------------------------------------------------------------------------------------------------------------ 1999 (c) 308,886,592 $685.7 911.2 2,708.9 $(224.5) -- $4,077.0 $13.20 $366.6 1998 302,064,369 670.6 883.6 2,204.2 94.7 ( 58.0) 3,795.1 12.56 331.6 1997 297,760,466 661.0 832.1 1,944.4 105.6 (184.6) 3,358.5 11.28 312.2 1996 303,013,639 672.7 826.1 1,626.2 10.6 ( .2) 3,135.4 10.35 284.3 1995 290,579,395 645.1 639.3 1,350.4 23.8 -- 2,658.6 9.15 271.0 1994 282,869,895 628.0 520.5 1,098.1 ( 66.9) -- 2,179.7 7.71 245.9 1993 280,982,447 623.8 442.0 936.9 20.0 -- 2,022.7 7.20 223.5 1992 272,162,755 604.2 365.8 748.9 -- ( .4) 1,718.5 6.31 190.3 1991 270,618,302 600.8 292.7 627.9 -- ( .4) 1,521.0 5.62 150.9 1990 260,269,607 577.8 289.3 508.3 -- -- 1,375.4 5.28 137.1 - ------------------------------------------------------------------------------------------------------------------------------
(a) Federal funds loaned and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements. (b) Number of shares outstanding and per share data have been adjusted for stock splits in 1998, 1997, 1996, 1992 and 1990. (c) Excludes non-officer employee stock grant of $4.3 million. 40 43 DIRECTORS AND OFFICERS FIFTH THIRD BANCORP DIRECTORS ------------------------------------------------- GEORGE A. SCHAEFER, JR., President & CEO Fifth Third Bancorp and Fifth Third Bank DARRYL F. ALLEN, Special Advisor to the Chairman Eaton Corporation JOHN F. BARRETT, President & CEO The Western & Southern Life Insurance Company GERALD V. DIRVIN, Former Executive Vice President The Procter & Gamble Company THOMAS B. DONNELL, Chairman Fifth Third Bank, Northwestern Ohio, National Association RICHARD T. FARMER, Chairman Cintas Corporation JOSEPH H. HEAD, JR., Chairman Atkins & Pearce, Inc. JOAN R. HERSCHEDE, President & CEO The Frank Herschede Company ALLEN M. HILL, President & CEO DPL, Inc. WILLIAM G. KAGLER, Former Chairman of the Executive Committee of the Board of Directors Skyline Chili, Inc. JAMES D. KIGGEN, Chairman BroadWing, Inc. JERRY L. KIRBY, Chairman Fifth Third Bank, Western Ohio ROBERT L. KOCH II, President & CEO Koch Enterprises, Inc. MITCHEL D. LIVINGSTON, PH.D., Vice President for Student Affairs & Human Resources University of Cincinnati ROBERT B. MORGAN, Executive Counselor & Director Cincinnati Financial Corporation DAVID E. REESE, Chairman Fifth Third Bank, Southwest F.S.B. JAMES E. ROGERS, Vice Chairman, President & CEO Cinergy Corporation BRIAN H. ROWE, Chairman Emeritus GE Aircraft Engines JOHN J. SCHIFF, JR., Chairman & CEO Cincinnati Financial Corporation DONALD B. SHACKELFORD, Chairman Fifth Third Bank, Central Ohio DENNIS J. SULLIVAN, JR., Executive Counselor Dan Pinger Public Relations DUDLEY S. TAFT, President Taft Broadcasting Company THOMAS W. TRAYLOR, Chairman & CEO Traylor Bros., Inc. ALTON C. WENDZEL, President & CEO Coloma Frozen Foods, Inc. DIRECTORS EMERITI ------------------------------------------------------------- Neil A. Armstrong Philip G. Barach Vincent H. Beckman J. Kenneth Blackwell Milton C. Boesel, Jr. Richard G. Brierley Clement L. Buenger Douglas G. Cowan Thomas L. Dahl Ronald A. Dauwe Nicholas M. Evans Louis R. Fiore John D. Geary Ivan W. Gorr Don R. Hinkley William A. Hopple III Paul W. Huenefeld William J. Keating Charles L. McKelvy, Jr. Michael H. Norris C. Wesley Rowles David B. Sharrock Stephen Stranahan N. Beverley Tucker, Jr. Richard E. Wagner FIFTH THIRD BANCORP OFFICERS --------------------------------------------------- GEORGE A. SCHAEFER, JR., President & CEO NEAL E. ARNOLD, Executive Vice President, Treasurer, CFO MICHAEL D. BAKER, Executive Vice President BARRY L. BOERSTLER, Executive Vice President JAMES R. GAUNT, Executive Vice President JAMES J. HUDEPOHL, Executive Vice President MICHAEL K. KEATING, Executive Vice President, General Counsel, Secretary ROBERT J. KING, JR., Executive Vice President ROBERT P. NIEHAUS, Executive Vice President PAUL L. REYNOLDS, Executive Vice President, Assistant Secretary STEPHEN J. SCHRANTZ, Executive Vice President GERALD L. WISSEL, Executive Vice President, Auditor ROGER W. DEAN, Senior Vice President, Controller AFFILIATE BANKS' CHAIRMEN, PRESIDENTS, CEOs ------------------------------------ THOMAS B. DONNELL, Chairman ROBERT J. KING, JR., Vice Chairman DONALD H. KINCADE, President & CEO Fifth Third Bank, Northwestern Ohio, National Association Toledo, Ohio ROBERT L. ERNST, Chairman Fifth Third Bank, Butler County JERRY L. KIRBY, Chairman R. DANIEL SADLIER, President & CEO Fifth Third Bank, Western Ohio Dayton, Ohio WILLIAM A. STINNETT III, Chairman STEWART M. GREENLEE, President & CEO Fifth Third Bank, Ohio Valley Hillsboro, Ohio DONALD B. SHACKELFORD, Chairman PATRICK J. FEHRING, JR., President & CEO Fifth Third Bank, Central Ohio Columbus, Ohio ROBERT J. KING, JR., President & CEO Fifth Third Bank, Northeastern Ohio Cleveland, Ohio WILLIAM J. WILLIAMS, Chairman TIMOTHY P. RAWE, President & CEO Fifth Third Bank Florence, Kentucky SAMUEL G. BARNES, President & CEO Fifth Third Bank Lexington, Kentucky JAMES R. GAUNT, President & CEO Fifth Third Bank Louisville, Kentucky JAMES J. GIANCOLA, President & CEO Fifth Third Bank, Indiana JAMES B. STURGES, Chairman MICHAEL J. ALLEY, President & CEO Fifth Third Bank Indianapolis, Indiana BRADLEE F. STAMPER, President & CEO Fifth Third Bank Valparaiso, Indiana DAVID L. KNAPP, President & CEO Fifth Third Bank Evansville, Indiana COLLEEN M. KVETKO, President & CEO Fifth Third Bank, Florida Naples, Florida DAVID E. REESE, Chairman WILLIAM A. ROBERT, President & CEO Fifth Third Bank, Southwest F.S.B. Scottsdale, Arizona (C)Fifth Third Bank 2000 Member F.D.I.C. - Federal Reserve System (R)Reg. U.S. Pat. & T.M. Office 44 [PHOTO] www.53.com EX-21 4 EXHIBIT 21 1 EXHIBIT 21 ---------- FIFTH THIRD BANCORP SUBSIDIARIES Jurisdiction of Name Incorporation - ---- ------------- Fifth Third Bank Ohio The Fifth Third Company Ohio The Fifth Third Leasing Company Ohio Fifth Third Auto Leasing Trust Delaware Fifth Third Insurance Agency, Inc. Ohio Midwest Payment Systems, Inc. Ohio Fifth Third International Company Kentucky Fifth Third Trade Services Limited Hong Kong Fifth Third Real Estate Capital Markets Co. Ohio Fifth Third Bank, Kentucky, Inc. Kentucky Fifth Third Bank, Northern Kentucky, Inc. Kentucky Fifth Third Bank, Central Ohio Ohio Fidelity Calvin Corporation Ohio American Home Foundation Ohio Fifth Third Bank, Northwestern Ohio, National Association Federal Fifth Third Mortgage Insurance/Reinsurance Company Vermont Fifth Third Bank, Ohio Valley Ohio Fifth Third Bank, Western Ohio Ohio Fifth Third Mortgage Company Ohio Fifth Third Real Estate Investment Trust, Inc. Maryland CF Property Management Company Ohio 2 EXHIBIT 21 ---------- FIFTH THIRD BANCORP SUBSIDIARIES Jurisdiction of Name Incorporation - ---- ------------- Fifth Third Bank, Indiana Indiana Peoples Building Corporation Indiana PIC Limited Bermuda Fifth Third Bank, Southwest, F.S.B. Federal Calvin Securities, Incorporated Arizona Fifth Third Bank, Florida Florida Civitas Bank Michigan Civitas Leasing, Inc. Kentucky Community Financial Services, Inc. Indiana Pecor Investments 1994 XXLP Indiana Wedgewood Partners, Inc. Missouri Civitas Insurance Indiana CNB Capital Trust I Indiana Fifth Third Securities, Inc Ohio IBI and Associates Indiana Fifth Third Community Development Company Indiana Fifth Third Investment Company Ohio Fountain Square Insurance Company Arizona 3 EXHIBIT 21 ---------- FIFTH THIRD BANCORP SUBSIDIARIES Jurisdiction of Name Incorporation - ---- ------------- Heartland Capital Management, Inc. Indiana State Savings Mortgage Company Arizona Calvin Hotel Co. Arizona EX-23 5 EXHIBIT 23 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-34075, 33-13252, 33-60474, 33-55223, 33-55553, 333-58249, 333-48049, 33-61149, 333-77293, and 333-84955 of Fifth Third Bancorp on Form S-8 and in Registration Statements No. 33-19965 and 333-84911 on Form S-4 and No. 33-54134, 333-58265, 333-42379, 333-80919, and 333-86645 on Form S-3 of our report dated January 14, 2000 incorporated by reference in this Annual Report on Form 10-K of Fifth Third Bancorp for the year ended December 31, 1999. March 30, 2000 Cincinnati, Ohio EX-27.1 6 EXHIBIT 27.1
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD BANCORP'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000035527 FIFTH THIRD BANCORP 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1,213,089 355,447 0 0 12,687,529 129,142 129,142 24,963,620 366,640 41,589,512 26,083,560 8,374,133 1,078,516 1,803,772 172,500 0 685,728 3,391,303 41,589,512 1,912,490 813,969 11,623 2,738,082 859,286 1,333,491 1,404,591 134,057 555 1,121,956 1,026,264 668,229 0 0 668,229 2.19 2.15 3.99 66,805 68,233 0 0 331,621 154,268 42,460 366,640 366,640 0 0 FINANCIAL DATA HAS BEEN RESTATED TO REFLECT THE FOURTH QUARTER 1999 MERGERS WITH CNB BANCSHARES, INC. AND PEOPLES BANK CORPORATION OF INDIANAPOLIS.
EX-27.2 7 EXHIBIT 27.2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999, JUNE 30, 1999, AND SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000035527 FIFTH THIRD BANCORP 1,000 3-MOS 6-MOS 9-MOS DEC-31-1999 DEC-31-1999 DEC-31-1999 JAN-01-1999 JAN-01-1999 JAN-01-1999 MAR-31-1999 JUN-30-1999 SEP-30-1999 901,638 941,901 891,346 143,534 147,682 394,831 0 0 0 0 0 0 12,353,721 12,638,561 12,761,330 124,282 101,687 132,207 124,091 107,155 131,990 22,652,735 23,700,856 25,250,958 336,377 350,486 373,242 38,061,118 39,987,015 41,446,488 24,668,315 25,601,981 25,006,594 5,693,158 6,717,762 8,979,955 1,096,954 1,019,066 1,008,458 2,542,160 2,609,964 2,371,239 172,500 172,500 172,500 0 0 0 671,594 676,441 684,646 3,216,436 3,189,301 3,223,096 38,061,118 39,987,015 41,446,488 451,418 916,831 1,408,967 186,972 389,172 596,522 2,416 3,399 6,735 640,806 1,309,402 2,012,224 201,033 403,726 620,933 301,711 617,986 963,521 339,095 691,416 1,048,703 25,391 60,662 90,310 1,632 2,620 (383) 254,311 520,553 777,055 265,987 538,007 831,203 176,342 356,514 551,962 0 0 0 0 0 0 176,342 356,514 551,962 .58 1.17 1.81 .57 1.15 1.78 0 0 0 71,780 75,210 83,750 91,311 79,920 87,686 0 0 0 0 0 0 331,621 336,377 350,486 29,107 62,685 91,508 8,070 18,769 28,547 336,377 350,486 373,242 336,377 350,486 373,242 0 0 0 0 0 0 FINANCIAL DATA HAS BEEN RESTATED TO REFLECT THE FOURTH QUARTER 1999 MERGERS WITH CNB BANCSHARES, INC. AND PEOPLES BANK CORPORATION OF INDIANAPOLIS.
EX-27.3 8 EXHIBIT 27.3
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD BANCORP'S ANNUAL REPORT ON FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000035527 FIFTH THIRD BANCORP 1,000 YEAR YEAR DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 1,045,368 963,840 164,760 211,528 0 0 0 0 11,183,935 10,215,015 121,880 315,913 121,882 321,617 22,356,524 21,898,954 331,621 312,264 37,092,266 35,180,173 24,495,784 24,289,566 4,514,636 4,391,386 1,050,702 835,340 3,063,590 2,305,341 172,500 0 0 0 670,582 661,000 3,124,472 2,697,540 37,092,266 35,180,173 1,856,733 1,761,411 718,811 696,855 10,383 19,346 2,585,927 2,477,612 908,320 936,907 1,315,947 1,304,077 1,269,980 1,173,535 123,489 116,946 12,352 8,471 1,066,207 849,902 833,828 797,115 546,512 529,379 0 0 0 0 546,512 529,379 1.81 1.78 1.78 1.75 3.93 3.86 77,177 102,059 87,002 55,779 0 0 0 0 312,264 284,284 142,791 121,707 32,962 30,535 331,621 312,264 331,621 312,264 0 0 0 0 FINANCIAL DATA HAS BEEN RESTATED TO REFLECT THE FOURTH QUARTER 1999 MERGERS WITH CNB BANCSHARES, INC. AND PEOPLES BANK CORPORATION OF INDIANAPOLIS.
EX-27.4 9 EXHIBIT 27.4
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1998, JUNE 30, 1998, AND SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000035527 FIFTH THIRD BANCORP 1,000 3-MOS 6-MOS 9-MOS DEC-31-1998 DEC-31-1998 DEC-31-1998 JAN-01-1998 JAN-01-1998 JAN-01-1998 MAR-31-1998 JUN-30-1998 SEP-30-1998 945,601 1,164,871 935,300 103,129 96,699 152,120 0 0 0 0 0 0 11,322,910 10,348,202 11,085,982 122,896 132,830 116,467 123,202 132,834 116,462 21,978,115 22,417,647 21,981,021 314,960 331,841 325,294 36,471,255 35,954,104 36,209,536 24,188,934 24,251,755 24,210,315 5,402,357 4,570,947 4,449,118 894,309 922,691 1,012,743 2,548,620 2,370,260 2,630,210 0 172,500 172,500 0 0 0 661,679 672,752 670,151 2,775,356 2,993,199 3,064,499 36,471,255 35,954,104 36,209,536 455,608 925,558 1,395,038 186,542 366,617 540,142 3,181 5,768 9,000 645,331 1,297,943 1,944,180 232,540 462,586 691,573 338,554 677,023 1,003,246 306,777 620,920 940,934 29,189 76,269 93,392 4,816 6,202 8,957 226,269 581,905 821,646 216,350 305,444 566,477 144,383 197,644 368,715 0 0 0 0 0 0 144,383 197,644 368,715 .48 .66 1.22 .47 .65 1.21 0 0 0 114,208 109,864 87,844 50,425 56,068 84,351 0 0 0 0 0 0 312,264 314,960 331,841 36,525 76,026 109,153 7,380 16,451 23,795 314,960 331,841 325,294 314,960 331,841 325,294 0 0 0 0 0 0 FINANCIAL DATA HAS BEEN RESTATED TO REFLECT THE FOURTH QUARTER 1999 MERGERS WITH CNB BANCSHARES, INC. AND PEOPLES BANK CORPORATION OF INDIANAPOLIS.
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